InfoSphere April Issue: Production Linked Incentive Scheme

In March of last year, the central government launched the Production Linked Incentive (PLI) scheme that aims at providing companies incentives on increased sales from goodbeen implemented for the production of pharmaceutical ingredients and medical instruments, as well as mobile and allied facilities. These industries are labour-intensive, and the expectation is that they will generate new employment for India’s rapidly growing employable population. The PLI concept is significant because the government cannot afford to invest in these capital-intensive sectors as they take longer to yield returns. Rather, it should welcome international companies with sufficient capital to set up operations in India. Indian government is taking important economic and fiscal steps to get the country’s economy back on track. Introducing and expanding production-linked incentives in different sectors was one of these steps. Output, exports, forex earnings, and jobs would all benefit from the recently approved package. 

For the next five years (2021-22 to 2026-27), the budget has set aside Rs 145,980  Crore for various PLI schemes. This is in addition to the Rs. 40,951 crore set aside for the manufacture of electronic products. Post COVID-19, this step will establish backward links with MSMEs, resulting in sustainable development and providing the necessary boost to economic growth. The scheme is extended to all businesses that fall into the above designated segments. The scheme seeks to create an equal opportunity for the sectors in comparison to other competitive countries, as well as address emerging challenges such as insufficient infrastructure, high financing costs, and skill development deficiencies. 

The central government implemented the PLI scheme for mobile manufacturing, as well as pharmaceuticals and medical equipment, in March of last year. The scheme for mobile and allied equipment was announced on April 1, 2020, while the regulations for the latter were announced on July 1, 2020. An incentive of 4-6% is planned as part of the PLI scheme for cell and computer equipment manufacturing for electronics companies that produce mobile phones and other electrical devices such as transistors, resistors, capacitors, etc. Likewise, the PLI scheme for medical products and equipment requires applicants to contribute a certain amount of expenditure to develop capacities in these fields, as determined by the government. As an incentive, within the next few years, firms will be paid a specific percentage of their revenue from manufacturing and selling bulk drugs or medical equipment. As time passes, the value of the reward will decrease. Over 50 essential active pharmaceutical ingredients, such as penicillin G, Vitamin B1, dexamethasone, meropenem, atorvastatin, and aspirin, are part of the PLI scheme for bulk medicines.

The PLI scheme strives to enhance structural adjustment, foreign trade, cost-competitive manufacturing, increased contribution in global value chains, and sales growth in the specified sectors. Furthermore, it will encourage global leaders to develop capacities in India, through the FDIs and provide productive jobs to the youth. The scheme is supposed to produce better results because it uses “milestone-based incentives” and is output-oriented, as opposed to previous systems, which were more dependent on multiple input variables. 

Comparing India with China, Vietnam, Korea, the other rival manufacturing economies one can see that they had robust trade-oriented industrial policies. They were combined with lower-wage jobs, labour law stability, lower enforcement, an excellent environment, and help on various taxes and duties to encourage exports. India’s stagnant manufacturing can be attributed to factors such as complicated and time-consuming compliances, land and power availability, high capital costs, a shortage of skilled labour, a lack of emphasis on R&D, and a fragmented supply chain with heavy reliance on imports. Although India is presenting itself as an economic hub, other countries are becoming more appealing and developing themselves in response to shifting concepts. In the current situation, the PLI scheme would give a significant incentive to multinational companies searching for alternatives to setting up operations outside of China. Thus, the purpose of extending the PLI scheme is to safeguard specific product areas and to impose non-tariff policies that boost the cost of imports. Furthermore, it recognizes the importance of exports in the overall development strategy, concentrates on the home economy, and promotes domestic manufacturing by providing production incentives.  

This article is coauthored by Siddharth Singh and Ashu Jain. Ashu Jain is a second year student of Economics and Finance at Ashoka University. Siddharth Singh has completed his graduation in Economics and is currently pursuing a Fellowship Program at Jindal Global University.

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