Are PLI schemes working?
While PLI scheme is an appreciable attempt to develop I ndian manufacturing sector,in its present incarnation it is riddled with many anomalies. — KK Srivastava
The focus of the present regime on building on Atmanirbhar Bharat cannot be questioned by any yardstick, particularly when we were captive of our own vulnerabilities of supply chains during the recent pandemic. One important policy measure in this direction of course is the Productivity Linked Incentive (PLI) scheme which aims at financially supporting various sectors so as to enhance their competitiveness, productivity, and production capacity. Indeed, at a macro level the government wants to have a shot at increasing our growth rate, push employment generation, increase exports, contain imports – all this through providing an enabling environment to domestic manufacturing (not necessarily by domestic manufacturers, though). If successful, the share of manufacturing in our GDP should go up from nearly 16-18 percent to 25 percent. This will also bring about a much-needed intersectoral balance in our economy which is presently sustained by services sector.
The aim is basically to establish a manufacturing ecosystem which is advanced enough to make our manufactures very competitive in international arena (in terms of cost, quality, reliability and other parameters). Not only this, the overall environment created should – it is hoped – attract even foreign capital into our economy, attracted by large local market, possibility of making and exporting competitive products, and be a part of global supply chains, especially when the whole world is talking about China plus one strategy. If all goes well, over the nest five years we would have a robust manufacturing sector which generates large scale employment and contributes significantly by ‘making in India’.
However, there needs to be a polemic against the tinted glasses (rosy?) worldview, which may not be rooted in reality. Putting it in a summary fashion, merely providing financial support has never worked – including in the past. Doling out of incentives without the accompanying enablers fail to hit the jackpot. So, are some commentators right in alleging that the present PLI schemes are, as designed and implemented right now, actually shortcuts, and no substitute for robust and comprehensive policy framework?
First of all, the PLI schemes are generally complex (to avoid any misuse) and need commitment of financial and cerebral resources towards their efficient and effective administration and implementation. Their success is sought to be determined by judging as to what extent these have delivered in terms of attaining the objectives, say increased exports, generated employment, quality enhancement, etc. While these targets are important, eventually any sector covered under such schemes should work towards becoming ‘sustainably’ competitive. But this is not happening, nor is it likely under present dispensation, since there are multiple issues. For example, the most pressing issue is about the ‘decided’ time frame to reach the ‘sunset’ stage; presently it is very vague. So, the scheme is likely to be rolled over again and again, making it susceptible to levying of (ever) infant industry argument against it? (Note: An ‘ever’ infant industry is one which in view of incentives provided to it so that it can stand up to ‘adult’ players refuses to grow).
Second, it is a recorded fact that in some areas, notwithstanding the PLI, imported items remain cheaper for the user. Third, the PLI structure favours capital intensive growth; thus it is unlikely to promote labour employment generation; rather it may deepen the unemployment crisis. In fact high tech sectors are getting incentives – automobiles, pharma, IT. But these sectors are shedding jobs due to arrival of labour displacing technology. On the other hand labour intensive sectors like textiles have failed to make much progress under earlier last three decades of schemes like tax holidays, zero tax, exemptions, deductions, rebates, credits, etc.
Fourth, some industries complain of high capex requirements. Thus, the first edition of schemes for textiles evoked little interest due to high investment required on one hand and minimum turnover criteria on the other. Similarly, others complain of delay in land acquisition.
Fifth, due to its nonfederal nature, the stimulus provided comes in the shape of being generic, and not customized. Unrelated geographies, dissimilar businesses, and nonsibling industries have been lumped together. Inevitably, the impact generated is subdued.
Sixth, since its by design structure favours large capex oriented investment, the beneficiaries too are large entities. The industrialists at the top decile capture nearly four fifth of the benefits extended by the government under the PLI scheme. As a corollary, smaller – and more specifically the MSMEs – are handed out peanuts. This is bad for the segments which need more crutches. But then perhaps the aim of the scheme is not to ‘reduce’ concentration of economic power, or even out growth among various segments of the industry. However, this fall out is an ugly one.
The unpleasant fact is that ‘incentives’ (read, subsidies) handed down since the ‘reforms’ phase of nineties (1991) provided by the ruling governments have not helped Indian manufacturing; or put it another way the contribution of manufacturing has not grown; it has stagnated at 16%. Moreover, due to western technology – which is labour displacing – adoption by modern manufacturing in India, the manufacturing sector provides less than 10% of total employment. It is in this background that Raghuram Rajan, the former Governor of RBI, suggests that India should not attempt to become the factory of the world – since it is mere wishful thinking sans concrete enabling ecosystem on one hand and tough competition from other nations on the other – and should concentrate on acquiring more services export orientation. We do not necessarily agree with him, but the fact does remain that, PLI scheme included, the ‘Make in India’ is a mere slogan as of now since India’s ecosystem is too weak and the support system too disjointed to convert our ambition into reality.
While it may be early days, the dismal fact is that nearly four fifth of ‘large’ manufacturers have limited scale-no where close to global size – or competitiveness. Naturally they fail to sell to the world market. In short, as of now the PLI scheme has delivered only on financial incentives to a limited extent. But the beneficiaries have failed to deliver on most counts.
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