Does India’s PLI Scheme Put The Cart Before The Horse?

The lack of operational details when unveiling a 10-sector scheme betrays unexplained haste & unpreparedness, writes Rajeev Kher.

A horse drawn carriage ferries passengers, in New Delhi, on May 14, 2020. (Photographer: Prashanth Vishwanathan/Bloomberg)
A horse drawn carriage ferries passengers, in New Delhi, on May 14, 2020. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Union Cabinet last week approved a production-linked incentive scheme for ‘ten key sectors for enhancing India's manufacturing capabilities and enhancing exports under its Atma Nirbhar Bharat’ resolution. An allocation of Rs 1.45 lakh crore has been committed for this scheme, with the largest share going to automobiles and auto components followed by advanced chemistry cell battery, pharmaceuticals and drugs. Then come telecom and networking products, textile products, food products. White goods, specialty steel, and high-efficiency solar PV modules, complete the list.

The guidelines to operate the scheme will be issued by respective individual sector ministries and the proposal for each sector will be approved by the cabinet after appraisal by the expenditure finance committee.

There is a provision for inter se transfer of funds from one segment of the scheme to another segment. The scheme proposes to serve the objective of making Indian manufacturers ‘globally competitive, attract investment in areas of core competency and cutting-edge technology, ensure efficiencies, create economies of scale and enhance exports and make India an integral part of the global supply chain.’

While the announcement has attracted attention, a detailed assessment of its merits would need a study of the guidelines that are yet to be notified.

Nevertheless, when seen in a context, this resolution—along with the three production-linked incentive schemes for mobile handsets, active pharmaceutical ingredients and key starting materials, and medical devices announced earlier—shows the direction that the government wishes to take for promoting manufacturing in the country, after seeing insipid results under the ‘Make in India’ initiative.

The salient elements of the direction seem to include the following:

  1. Protect identified product areas through higher tariffs;
  2. Assiduously work towards introducing non-tariff measures to make imports difficult,
  3. Acknowledge the relevance of exports in overall growth strategy but focus more on the domestic market
  4. Promote manufacturing at home by offering production incentives and encourage investments both from within and outside.
The fact that the announcement covers several sectors and subsectors without saying much about the operational details, unfortunately, betrays unexplained haste and unpreparedness.
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What’s Prompted This Move?

This haste may have been prompted by the challenges in the current global economic environment, and the perceived unsustainability of what was a growing dependence on Chinese imports. Then you have the potential relocation or diversification of production capacities by global multinationals due to pandemic-led realignments. Domestically, policymakers face the rising challenges of unemployment and the drop in economic growth.

The lack of detail at the present stage will lead to great scrutiny and assessment of the actions that will follow. That said, the government has good three and a half years to implement the scheme before it goes to the hustings yet again. There is a large canvass to paint on. It also needs to carry out follow-up action concerning the recent legislative changes in the agriculture sector, which too have significant consequences for manufacturing.

It has become a distilled view now that we require a focused sector-specific strategy to promote manufacturing. A comprehensive approach is required for every selected sector, which we hope to see following the guidelines for operationalisation of the scheme, along with the entwined development of the corresponding ecosystem.

It needs no emphasis that the scheme by itself can do little in achieving its objectives unless the entire production ecosystem is correspondingly geared to it.

So, the bigger challenge is to build linkages among various pillars of a sector than only implement an incentive programme.

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Adapting To Shifting Winds

The rationale for production-linked incentives is based on the need to remove disadvantages that manufacturers in selected sectors face, when competing with players from nations considered leaders in those sectors.

Decades ago, India had adopted a somewhat similar approach through a phased manufacturing programme for the automobile sector. There were no production incentives then. Tariff walls, regulatory protection, and definitive action despite challenges in the WTO, worked well. Global market access for domestic production was not even on the agenda and investments sought were entirely aimed at the domestic market. However, several factors have changed thereafter.

We are far more integrated now with the global economy. We have also onboarded a few regional and global value chains. Major markets are better integrated now though we have remained reluctant in the process losing out on advantages of such integration offers.

While India positions itself as an investment destination, several others are more attractive than India for global investors and have already established themselves in the changing paradigm.

Capital intensity is intrinsic to the pursuit of high value-added production, therefore scales of production and quantum of investment are quite important for achieving competitiveness. This global connect in today’s manufacturing does not allow a protectionist world view. Instead, it necessitates strategic articulation of that connect in domestic policymaking for manufacturing.

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Erratic Approach?

Such a broad sweep of coverage is hard to implement and may defeat the very objectives of the scheme. The three schemes announced earlier were unique in that they addressed specific products. Unfortunately, the new announcement covers multiple segments of sectors covered, making the ambit of the scheme unmanageable.

The financial allocations while appearing to have been worked out on some estimations, do not seem comprehensive or complete. For example, when talking of a technology-linked sector like pharmaceuticals, is there consideration for the magnitude of research and development, and innovation infrastructure and institutions required to promote and sustain the desired levels of manufacturing?

Are we contemplating such an ambitious manufacturing plan entirely based on the government research institutions—most in the bureaucratic mold—and their programmes? If industry and academia are expected to contribute, what is the social contract between the government and them? This will hold true for all technology product areas.

Foreign direct investment will be a large determinant in ensuring the implementation of the policy intent. Investments will be constrained unless production at a global scale is envisaged. This is further accentuated by the multilayered consumption scenario in India, particularly for technology products, and its impact on the scale of production due to constraints on consumption and consequently on competitive pricing. Foreign investment needs to also bring global best practices, latest technologies, and assured access to third markets.

To be able to participate in such global and regional value chains, import tariffs will have to be correspondingly calibrated. Are we prepared for that?

What is our plan to scale up our technical regulatory architecture? Despite resolutions, we have not moved much on the standards ladder. On the contrary, we find the use of standards in the policy lexicon as a ‘protection device’ rather than as a means of producing world-class products. Global lead manufacturers will hesitate in investing if they do not see corresponding changes in these areas.

Above all how do we make establishment, production, and trade easy for the proponents? It was reported that the bid document for the automobile sector ran into 187 pages. A scheme of such magnitude cannot be monitored and implemented by routine mechanisms and institutions. An Empowered Committee of Secretaries may be adequate for the desk function of approvals and allocations. For targeted implementation, a strong, technically-evolved, institutional mechanism accountable to the highest levels of governance is necessary.

There is no alternative to a comprehensive approach nuanced with appropriate growth strategies. Comprehensive treatment will be required on all the elements needed to develop a global ecosystem for manufacturing in the chosen sectors. That’s how this ambitious announcement of intent can be taken to its logical end.

Rajeev Kher is Distinguished Fellow, Research and Information System for Developing Countries; and was Commerce Secretary, Government of India.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.