Can PLI be a boost to the Manufacturing Sector of the Indian Economy?

Unlike earlier electronics manufacturing schemes, several global electronic giants like Samsung, Pegatron and 20 others applied under the Product Linked Incentivization Scheme which was recently extended to the electronics sector. Seeing this enthusiasm, the government has decided to extend the scheme to 10 other sectors, with a view to make India a manufacturing hub

Manufacturing sector of the Indian industry has consistently underperformed in the last few decades, with a mere 16-17% contribution to the GDP. Compare this with China’s manufacturing sector which contributes around 29% to its GDP or even what India had envisioned in its National Manufacturing Policy, 2011 (i.e. 25%). 

Keeping this underperformance and the growth potential of the manufacturing sector in mind, Indian government has recently announced inclusion of several sectors in its Production Linked Incentivization Scheme.

But will this scheme be able to create the 0.3 million jobs envisioned by the government?

What is PLI?

The unique feature of the Production Linked Incentive Scheme is that, unlike earlier schemes, cash incentives would be given based on the outcome. For instance, in electronic manufacturing, eligible electronic companies will get 4-6% incentive on incremental sales of manufactured goods (mobile phones and electronic components).

“This scheme will give cash incentives for five to seven years and all the sunrise and important sectors are proposed to be covered in this,” said Economic Affairs Secretary Tarun Bajaj. “Unlike our other schemes, this is an outcome- and output-oriented scheme… incentives will be paid only if the manufacturers make the goods” he added.

Features of the scheme

• Cash incentives for 5-7 years
• Only domestic or foreign firms with a registered unit in India eligible
• Cash incentives only on investments made on plant, R&D, technology transfer while those on land and buildings are not eligible

Enthusiastic reception

Several global tech giants welcomed the step of including electronic manufacturing in the PLI scheme with a lot of enthusiasm. Recent reports suggest that Apple is planning to bring nearly a fifth of its production capacity to the country in the next five years.

One of the reasons for this enthusiasm is that for global players, India presents itself as a large domestic market apart from having huge export potential.

Due to such a reception of the scheme, the government has now decided to extend it to around 10 more sectors of the economy. The government hopes that this would help India become a manufacturing hub.

Will it be able to actualize the growth potential of the manufacturing sector?

The scheme is meant to contribute to creation of jobs in several ways.

• Domestic production- The scheme is applicable to either domestic companies or foreign companies with registered units in India. This will incentivize major global players to establish their units in India and conduct their manufacturing activities in the country only, which will be a major boost to Atma Nirbhar Bharat. Domestic production will also enable better utilization of the country’s labor surplus.

• Labor intensive nature- Manufacturing sector is said to be much more labor intensive than services sector. Along with that, it can absorb unskilled and semi-skilled workforce, unlike the services sector which mainly employs only skilled or highly skilled workers.

• Spill over effect to the services sector- Manufacturing sector is given so much attention because of its immense job growth potential. Studies have shown that every job created in the manufacturing sector has a multiplier effect in creating 2 to 3 jobs in the service sector

“Studies have shown that every job created in the manufacturing sector has a multiplier effect in creating 2 to 3 jobs in the service sector”

• Higher foreign investment- With this scheme, the government aims to make Indian market attractive to foreign investors. Increased investment will increase economic production and thus create more jobs.

• Increased expenditure R&D- Since cash incentives will be given on expenditures made on R&D and technology transfer, it’ll encourage companies to invest more in it. Such investments can improve innovation and thus contribute to job growth.

“The scheme is expected to result in production worth ₹10.5 trillion, out of which more than 60% will be contributed by exports. The scheme will bring additional investment to the tune of ₹11,000 crore and create 0.3 million direct jobs in the next five years, an official statement said”

As per reports, the Covid-19 lockdown in China has led to discrepancies in supply of electronics goods. India is perceived to be a good alternative to China for companies to invest in due to its large domestic market size. India now has the opportunity to present itself as a viable alternative to China in the next 5 years.

In this crucial time when the country is under lockdown and the industry is facing a standstill, this scheme can act as a major boost to the manufacturing industry in India.