The Production Linked Incentive (PLI) Scheme in India

The PLI scheme is likely to benefit the automobile sector, the ACC Battery Sector and the Renewable Energy Sector the most.

The central government of India in March 2020 introduced a PLI (production-linked incentive) scheme with the aim of giving a boost to domestic manufacturing and to reduce import bills. After the COVID Pandemic, attracting investment is key for the incumbent government to revive an economy heading for its deepest contraction this financial year. The government has taken several steps already such as cutting of corporate taxes and making them amongst the lowest in Asia, easing foreign direct investment norms and improving the ease of doing business.

In November 2020, the Indian government approved an incentive driven programme worth 20 billion USD to attract and invite companies to come and set up manufacturing units in India. The production-linked incentives will be offered to 10 sectors including automobile, batteries and specialty-steel makers over a five-year period. Textile units, food processing plants and specialized pharmaceutical product makers are also eligible for the incentives. The PLI scheme will be active for five years with financial year 2019-20 considered as the base year for calculation of incentives. This means that all investments and incremental sales registered after 2020 shall be taken into account while computing the incentive to be given to each company.

The PLI Scheme was mooted by India’s main policy planning body Niti Aayog and follows the template of a programme brought earlier this year to attract business to India. Samsung Electronics Co. and iPhone manufacturers Hon Hai Precision Industry Co. and Wistron Corp. are some of the companies that have pledged $1.5 billion to set up mobile-phone plants after India offered to pay them an amount equivalent to 4%-6% of their incremental sales over the next five years.
Analysis of the PLI Scheme
  • The government cannot continue making investments in these capital intensive sectors as they need longer times for start giving the returns. Instead, what the PLI scheme does is that it invites global companies with adequate capital to set up capacities in India.
  • The scheme is expected to benefit up to 136 manufacturing units, generating incremental sales of INR 46,400 crore and significant additional employment generation over the next eight years.
  • The scheme gives greater impetus to manufacturing and will propel India as a global manufacturing hub whilst increasing FDI opportunities and encouraging local companies to set up or expand presently existing manufacturing units. 
  • The sectors for which the PLI scheme has been extended are labour intensive and are likely to create new jobs for the rapidly increasing employable workforce of India.
  • Extending of subsidies to new sectors will incentivize corporates to set up units in the emerging sectors such as advanced battery cells and solar power modules. It would also help in plugging gaps in domestic supply chains that necessitate imports.
  • The Scheme is unlikely to put more financial burden on the government as they have limited the scope of several export incentives and limited them to duty refunds which has boosted savings.
  • Unlike previous schemes where exporters would benefit from the incentives offered, the PLI scheme follows a more focused approach with benefits trickling in for larger manufacturers irrespective of whether global or domestic.
  • The PLI scheme is not on a short termed basis but it is a long term scheme on the part of the government to propel India as a manufacturing hub for new age industries and industries which are labour intensive. This is something which is meant to last for the next 5-7 years
  • Manufacturing has been emphasized in its significance in driving India’s growth and creating jobs in the country at a large scale. For investors and manufacturers, India offers an attractive domestic market, with a large population in the educated and earning segment. It also has a strong institutional framework which allows for a smooth functioning of the industry.
  • A key benefit of the PLI Scheme is that it can be implemented in a very strategized manner to attract investments in areas of strength and to enter certain segments of global value chains (GVCs). This will help bring scale and size in key sectors and create and nurture global manufacturing giants
Which sectors qualify for the PLI scheme and which will benefit the most?

The central government introduced the PLI scheme in March of 2020 for mobile manufacturing as well as pharmaceutical ingredients and medical devices. In November 2020, the PLI scheme was approved for 10 sectors by the Union Cabinet.
  • As a part of the PLI scheme for mobile and electronic equipment manufacturing, an incentive of 4-6 per cent is planned for electronics companies which manufacture mobile phones and other electronic components such as transistors, diodes, thyristors, resistors, capacitors and nano-electronic components such as micro electromechanical systems.
  • Similarly, the PLI scheme for pharmaceutical ingredients and medical devices seeks that applicants will commit a certain amount prescribed by the government as investment to build capacities in these areas. The government will pay the companies it selects for the scheme a specific proportion of their turnover from making and selling the bulk drugs or medical devices as an incentive over the next few years. The PLI scheme for bulk drugs focuses on building economies of scale in over 50 critical active pharmaceutical ingredients, including penicillin G, vitamin B1, dexamethasone, meropenem, atorvastatin and aspirin.
  • Steel has always been a strategically important industry and India is the world's second largest steel producer in the world. It has the potential to become a champion in certain grades of steel. A PLI scheme in Specialty Steel will help in enhancing manufacturing capabilities for value added steel leading to increase in total exports.
Sectors to benefit most from the PLI scheme:

The PLI scheme is likely to benefit the automobile sector, the ACC Battery Sector and the Renewable Energy Sector the most.
  • The Automotive Industry is a major economic contributor in India and the PLI scheme will make the Indian automotive Industry more competitive and will enhance globalization of the Indian automotive sector. This will also improve export and will make the production better.
  • India currently imports about a billion dollars’ worth of batteries annually. The target for India is to have 50,000 Mega Watt MW battery manufacturing capacity in the country by 2026. ACC battery manufacturing represents one of the largest economic opportunities of the twenty-first century for several global growth sectors, such as consumer electronics, electric vehicles, and renewable energy. The PLI scheme for ACC battery will incentivize large domestic and international players in establishing a competitive ACC battery set-up in the country and help India achieve its Clean Energy targets set for 2022. It will also kick-start deployments of energy storage technologies in a systematic manner that will help investors to commit billions of dollars required for building factories and the rest of the supply chain.
  • The renewable energy sector in India is still at a nascent stage and the government wants to reduce import dependence. The PLI scheme will help this sector and give a boost to the domestic companies. A focused PLI scheme for solar PV modules will incentivize domestic and global players to build large-scale solar PV capacity in India and help India leapfrog in capturing the global value chains for solar PV manufacturing and help India achieve its ambitious target of 175 GW of renewable energy capacity by 2022.

Sectors eligible for the PLI Scheme

Sectors

Department/Ministry

Costs incurred by Government

Automobiles and Auto Components

Department of Heavy Industries

INR 57,042 Cr.

Pharmaceuticals drugs

Department of Pharmaceuticals

INR 15,000 Cr.

Advance Chemistry Cell (ACC) Battery

NITI Aayog and Department of Heavy Industries

INR 18,100 Cr.

Telecom and Networking Products

Department of Telecom

INR 12,195 Cr.

Food Products

Ministry of Food Processing Industries           

INR 10,900 Cr.

Textile Products              

Ministry of Textiles

INR 10,683 Cr.

Speciality Steel

Ministry of Steel

INR 6,322 Cr.

White Goods (ACs and LED)

Department for Promotion of Industry and Internal Trade

INR 6,238 Cr.

High Efficiency Solar PV Modules

Ministry of New and Renewable Energy

INR 4,500 Cr.

Electronic/Technology Products               

Ministry of Electronics and Information Technology

INR 5,000 Cr.



Conclusion

The backbone of the economies of developing nations and developed nations has always been Manufacturing.  It has often been the biggest contributor to employment across both skilled and unskilled labour force.

The PLI scheme by the Indian government is an integral step to integrate India as a pivotal part of this modern economy as there is a strong need to step up our manufacturing capabilities in sectors of high growth, including the cutting edge technology sectors. The PLI scheme will propel India’s economic growth by allowing companies to effectively penetrate the global supply chains in the chosen sectors.

The government had for long shunned the idea of offering fiscal incentives to attract investments but the PLI scheme is seen as a reversal of that trend as the government seeks to build a strong manufacturing base in the country to create jobs and reduce imports, especially from China