The PLI scheme is result-oriented. The cash incentives will be paid only if the manufacturers make the goods. It is a better alternative

The Central Government has approved production-linked incentives (PLI) for manufacturers in 13 sectors. It essentially means that if an eligible manufacturer produces and sells/exports eligible goods worth Rs 100 crore, the Government will give him Rs 5 crore (assuming five per cent incentive) as a reward/incentive because such sale/export of locally manufactured goods will create local jobs.

The PLI will be available for sale/export for the next five years in addition to the existing incentives. Now this is one of the concerns that remains for investors and would need to be addressed to make the scheme a success. As the PLI benefit has been assured only for five years, the investor has to assess the financial viability of the project beyond the PLI period. Once a manufacturing unit has been set up with a lot of fixed investment, recovery may be difficult. So the five-year period has to be utilised to make life easy for all businesses and job creators. In other words, the “ease of doing business” has to improve substantially.

The Government expects that it may be called upon to pay about Rs 2 lakh crore, which means a total sale/export of about Rs 40 lakh crore (assuming five per cent PLI rate) during the next five years. This PLI will increase local manufacturing of eligible goods by an output equal to about 20 per cent of the current GDP.

Thus, the second concern is changing growth dynamics and the global demand scenario, especially in the post-pandemic world. To get free cash of Rs 2 lakh crore from the Government, specified goods worth about Rs 40 lakh crore would need to be produced in India and a matching demand would be needed in a world where the cut-throat competition is going to deepen.

The third concern is about how much of the PLI benefit would boost the investor’s actual post-tax income. In October, the Ministry of Electronics and Information Technology (MEITY) approved PLI  benefits (four per cent to six per cent) to 16 companies. The PLI is available for incremental sales of goods manufactured in India five years subsequent to the base year (FY 2019-20).

Now, whether the incentive of four per cent to six per cent of invoiced price for five years would be enough compensation to offset the cost disadvantage in India remains to be seen. One plus point in favour of the new manufacturing units is 15 per cent corporation tax that was announced last year. For them, manufacturers of highly branded products like Apple iPhones, the PLI scheme and reduced corporate tax are major incentives. Since such manufacturers face little competition for their products, they can set prices of their products on their own. The PLI benefit may or may not be fully passed on to the retail buyers in this particular case.

Most other manufacturers may face stiff price competition and may not be able to fully pocket the PLI benefit to offset their cost disadvantage. Their discerning, hard-bargaining buyers will demand price discounts on the basis of the PLI benefit.

The percentage of PLI benefit may vary across beneficiaries and depending on the competition, the post-tax actual benefit could vary from investor to investor. The PLI scheme, therefore, needs supplementation by sustained investor facilitation and improvement in ease of doing business.

Incentives like income tax and Central excise exemptions, VAT/GST reimbursements, interest and insurance subsidies, subsidies on plant/machinery and so on are typically provided for industries set up in industrially-backward areas like North-eastern states.

At present, the total manufacturing output of all items (whether PLI eligible or not) in a year is about 16 per cent of the GDP. The services sector has a 55 to 60 per cent contribution in GDP and has been a major employer so far.

The PLI will be available to all new manufacturing units and also to existing manufacturing units for their extra production, additional over baseline output. For example, existing mobiles and electronics manufacturers are entitled to PLI benefit for whatever they produce over and above the 2019-20 level production in the next five years. The manufacturing units will have to apply, register and go through a vetting process and enter into proper agreement with the Government so as to ensure that only eligible manufacturers get the incentive for actual local manufacturing.

On April 1, a PLI scheme promising Rs 40,951 crore incentive (four to six per cent of production value) was notified for manufacturers of mobile phones and other electronic components. Medical devices and bulk drugs (active pharmaceutical ingredients) were added to PLI eligibility in July and on November 11, 10 more manufacturing sub-sectors were added.

Thus, Rs 1,97,291 crore of cash incentive has been promised in the next five years to manufacturers of automobiles and auto components (Rs 57,042 crore); mobile manufacturing and specified electronics/technology products (Rs 45,951 crore); advance chemistry cell batteries (Rs 18,100 crore); pharmaceuticals and drugs (Rs 21, 940 crore); medical devices (Rs 3,420 crore); telecom and networking products (Rs 12,195 crore); processed food (Rs 10,900 crore); man-made fibres and technical textiles (Rs 10,683 crore); high-efficiency solar PV modules (Rs 4,500 crore); white goods like ACs and LEDs (Rs 6,238 crore) and speciality steel (Rs 6,322 crore).

For its move in October to approve grant of PLI benefit (four to six per cent ) to 16 companies, MEITY received a very good response from mobile handset manufacturers.

The production of mobile phones surged from about Rs 18,900 crore in 2014-15 to Rs 170,000 crore in 2018-19. Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron have been granted PLI benefit only for manufacturing high-end phones (invoice value Rs 15,000 and above). 

Foxconn Hon Hai, Wistron and Pegatron are contract manufacturers for Apple iPhones. They expect to have a major export turnover for high-end phones. Some Indian mobile phone companies, including Lava, Bhagwati (Micromax), Padget Electronics, UTL Neolyncs and Optiemus Electronics, have also been approved for PLI.

This scheme aims to make India a manufacturing hub of global repute, reduce imports and generate employment. It covers both low-value and high-employment items like textiles and food as well as high-value and low-employment items like automobiles, mobiles, electronics, white goods, including high technology items like Advanced Chemical cell battery. Incentivising local manufacture of items like ACC battery, auto and electronics components will help India become part of the global value chains. The automobile industry turnover already accounts for almost half of the total value of manufactured items.

The auto, electronics and pharma industries, which have substantial import dependence and also high export potential, are major beneficiaries of the scheme while textiles and processed food are major employment generators.

A pertinent question is why should the Government give financial assistance of Rs 900 to a phone manufacturing company for every phone sold at Rs 15,000 (assuming six per cent PLI)? After all, more than half of the value of a phone may comprise imported components. The answer to this question is local employment.

The exports, in any case, are tax-free. Under the WTO rules, a Government can refund all taxes collected from exports so that the local taxes are not exported to foreign buyers. So, whatever Customs, excise duties and GST are paid on exported items, they are eventually refunded by the Government. Often, exporters face the problem of working capital if the refund is delayed.

There is a growing demand in the world for diversification in supply chains and India can become a major player. The promotion of the manufacturing sector means forward integration with global supply chains and backward linkages with the MSME sector.

The domestic electronics hardware manufacturing faces a lack of a level-playing field vis-à-vis competing nations. It is assessed that it costs about 8.5 per cent to 11 per cent more to manufacture these items in India on account of lack of adequate infrastructure, domestic supply chain and logistics; high cost of finance; inadequate availability of quality power; limited design capabilities and focus on R and D by the industry; and inadequate skill development. Sunrise sectors  need support in the initial stages.

Traditionally, we have tried to attract investors with investment subsidies like giving land at concessional rates and subsidy on plant and machinery cost at a fixed percentage of say 15 per cent to 20 per cent of price. Thereafter, if the unit does not properly run, the subsidy goes waste. The PLI scheme is result-oriented. The cash incentives will be paid only if the manufacturers make the goods. It is a better alternative from the Government’s viewpoint.

(The author is former Special Secretary, Ministry of Commerce and Industry)