How the PLI scheme transforming Indian manufacturing

Atmanirbhar Bharat Abhiyaan or the Self-reliant India campaign is the vision of new India envisaged by the Hon'ble Prime Minister Shri Narendra Modi. On 12 May 2020,

The aim is to make the country and its citizens independent and self-reliant in all senses. He further outlined five pillars of Aatma Nirbhar Bharat – Economy, Infrastructure, System, Vibrant Demography and Demand.

India is on its way to becoming self-sufficient. In March 2022, Indian exports surpassed $400 billion for the first time.

The Government of India also created the PLI scheme to help India become self-sufficient. The objective of this scheme is to boost domestic manufacturing, and also give incentives on incremental sales from products manufactured in domestic units. Apart from inviting foreign companies to set shop in India, the scheme also aims to encourage local companies to set up or expand existing manufacturing units.

What is a Production-Linked Incentive Scheme?

Assume you are the government and you want to increase the production of a specific type of product. The demand for such items isn't particularly high. But you believe that once they are manufactured in large quantities or sold at the appropriate price points, everything will be fine.

This is where you will use PLI or a production-linked incentive scheme. The PLI is an old and popular tool used by governments to encourage the production of goods deemed necessary for social good, taxation, or job creation.

Initially, this scheme has targeted three industries – mobile manufacturing and electric components, pharmaceutical (critical key starting materials/active pharmaceutical ingredients), and medical device manufacturing. Later this concept has expanded with schemes rolled out for multiple sectors to boost India’s manufacturing capabilities and encourage export-oriented production.

As these sectors are labour intensive and are likely, and the hope is that they would create new jobs for the ballooning employable workforce of India.

As of November 2021, the PLI schemes covered 13 sectors with a total budgeted outlay of INR 1970 billion (US$26.48 billion)

Each PLI scheme is applicable for a four to six-year duration period, depending on the sector.

It is envisaged that India’s total industrial production will increase by over US $520 billion during the period covering PLI policy implementation. Additionally, the government is also working on reducing the compliance burden, improving the ease of doing business, creating multi-modal infrastructure to reduce logistics costs, and constructing district-level export hubs.

How this scheme will work?

The PLI schemes provide eligible manufacturing companies incentives ranging from four to six percent on incremental sales over the base year of 2019-20 for a four to six-year period.

As a part of this scheme for mobile and electronic equipment manufacturing, an incentive of 4-6 per cent is planned for electronics companies that manufacture mobile phones and other electronic components such as transistors, diodes, thyristors, resistors, capacitors and nano-electronic components such as micro-electro-mechanical systems.

The PLI incentives could be in the form of tax rebates, Import and export concession, or maybe easier land acquisition terms. Generally, the benefits of the PLI Scheme are passed on to the final consumers of the goods in terms of lower prices.

How does this scheme benefit manufacturers?

ICEA said exports of mobile phones from India had jumped about 75 per cent in one year to $5.5 billion (about ₹42,000 crore) early this month from $3.16 billion (about ₹24,000 crore) at the end of 2020-21.

The primary driver of this outstanding performance is the smartphone PLI Scheme launched on April 1, 2020, aimed at shifting GVCs to India and increasing India's share in global exports.

The smartphone PLI saw participation from five global companies -- Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron -- and Indian champions, including Lava, Bhagwati (Micromax), Padget Electronics, UTL Neolyncs and Optiemus Electronics.

ICEA also projects that Mobile phones exports from India to cross 43,000 crore by the current financial year ending March 31, 2022.

In the past, mobile phones from India were primarily exported to South Asia, Africa and parts of the Middle East and Eastern Europe but now companies are targeting some of the most competitive and advanced markets in Europe and developed Asia.

During a 5-year period, the approved companies under the PLI scheme are expected to lead to the total production of over ₹10.5 lakh crore, of which nearly 60 per cent will be contributed by exports to the tune of ₹6.5 lakh crore.

On March 15, 2022, 75 companies secured PLI approval under the Component Champion Incentive Scheme, including Maruti Suzuki, Hero MotoCorp, Tata Autocomp, Mitsubishi Electric, Toyota Kirloskar, Motherson Sumi, Bosch, and Lucas-TVS.

On February 11, 2022, 20 companies were approved as PLI beneficiaries under the “Champion OEM Incentive Scheme”. Altogether, the approved applicants (including existing automotive and auto component firms and new non-automotive industry investors) have proposed investments worth INR 450.16 billion (US$5.88 billion)

Govt Estimates

(PLI) announced by the government in 14 sectors will create 60 lakh jobs and has potential to generate ₹30 lakh crore in production over the next five years, finance minister Nirmala Sitharaman said in the Lok Sabha while presenting the Union Budget for 2022-23.

The Economic Survey has estimated the scheme will result in a fresh investment of ₹19,000 crore in the textiles sector over the next five years. This is expected to create a cumulative turnover of over 3 lakh crore and create over 7.5 lakh additional job opportunities in this sector.

The 13 key sectors include already existing three sectors, namely mobile manufacturing and specified electronic components; critical key starting materials/drug intermediaries and active pharmaceutical ingredients; manufacturing of medical devices and 10 new key sectors which have been approved by the Union Cabinet in November 2020. The scheme was also introduced for an additional sector, drones and drone components, in September 2021.