By Aryan Govindakrishnan 

Abstract

India’s manufacturing policies, such as the National Manufacturing Policy and the Production Linked Incentive (PLI) Scheme, have had a favourable impact on the rates of export and import growth. The implementation of the PLI scheme in 2020 resulted in a notable expansion of export growth within various sectors, including chemical derivatives, medical equipment, and heavy machinery. There are still obstacles that need to be overcome in order to attain self-sufficiency and enhance the manufacturing sector’s impact on the Gross Domestic Product (GDP).

Introduction

India, a $3 trillion economy with a population of 1.3 billion, has transitioned from a closed economy to a more market-oriented one through liberalisation, privatisation, and globalisation policies. The shift has proven to be advantageous, given that the service sector contributes to approximately 50% of India’s GDP. In a remarkable display of resilience, India’s service industry, widely regarded as the nation’s fastest-growing sector and a significant contributor to its GDP, has witnessed a staggering 10.8% growth during the initial half of the fiscal year 2021–22. The gross value added (GVA) in the service sector is expected to increase by 9.1% in FY23. India’s industrial base was established by policies of 1948, 1956, and 1991, aiming to provide a strong manufacturing base. However, liberalisation has shifted the focus towards the service sector, with the manufacturing sector growing twice the national growth rate but contributing just over 16% of the total GDP. This is concerning, as India’s dependence on key manufacturing goods for pharmaceuticals and heavy machinery is reliant on imports from China and other countries. Addressing the low level of value added in domestically produced goods and rising capital equipment imports is crucial for long-term competitiveness in key industries like defence and telecommunications. A strong indigenous value chain component is also crucial for national security.

Analysis of manufacturing policy in India

National Manufacturing Policy (2011)

1. With the aim of increasing manufacturing’s contribution to GDP to 25% within a decade and producing 100 million jobs, the Indian government has launched a national manufacturing policy. By providing the essential skill sets to make rural children employable, it also aims to give them more power. The policy’s ethos including sustainable development and technology value addition in manufacturing, has gotten particular attention.
2. The policy is founded on the idea of industrial development in collaboration with the States. The Central Government will establish the enabling policy framework, offer Public Private Partnership (PPP)-based incentives for infrastructure development, and encourage State Governments to use the policy’s offered tools. 
3. With the exception of the incentive for green technology, the policy’s ideas are mostly neutral in terms of industry, geography, and technology. The National Investment and Manufacturing Zones (NIMZs) is an important tool, but the recommendations made in the Policy apply to the manufacturing sector nationwide, including any location where the sector is able to form clusters and adopt the outlined model of self-regulation.

Production Linked Incentive Scheme (2020)

1. The Finance Minister has disclosed a budget allocation of INR 1.97 Lakh crore for the Production-Linked Incentive (PLI) Schemes in 13 crucial sectors as part of the Union Budget 2021–22, which was formally presented on February 1st, 2021. The allocated funds will be utilised to foster the growth of domestic manufacturing leaders and generate employment prospects for the nation’s youth. It is expected that the minimum production in India, as a result of the PLI Schemes, will surpass US$ 500 billion within a span of 5 years.
2. One of the key elements of the government’s initiative to foster self-reliance in India is the implementation of Production-Linked Incentive (PLI) Schemes. The objective is to enhance the competitiveness of domestic manufacturing at a global level and foster the development of leaders within the manufacturing industry. The objective of the programme is to offer enterprises incentives that are contingent upon the growth in sales of goods manufactured in India compared to the base year. These initiatives have been specifically designed to enhance domestic manufacturing in strategic and emerging sectors, reduce import expenses and reliance on cheaper imported goods, enhance the cost competitiveness of domestically manufactured products, expand domestic production capabilities, and stimulate export growth.

Production Linked Incentive for Large-Scale Electronic Manufacturing 

1. The proposed Production-Linked Incentive (PLI) scheme aims to provide a financial incentive to stimulate domestic manufacturing and attract significant investments in the electronic value chain, specifically targeting the production of mobile phones and specified electronic components. A financial incentive of INR 1.4 trillion has been proposed.
2. The proposed scheme will effectively enhance India’s manufacturing capacities, resulting in substantial economies of scale. This, in turn, will contribute to the expansion of the supply chain ecosystem within the country.
3. The programme offers a 4-6% incentive on sales growth for a period of five years following the initial year.

Production linked Incentives for Pharmaceutical Industry

Medical Equipment manufacturing 

1. A financial incentive is provided through the Production Linked Incentives Scheme (PLI) for Medical Device Manufacturing to stimulate domestic production and encourage considerable investment in the medical device market.
2. Proposed financial incentive of 40,000 crores in renal care medical devices, anaesthesia and cardio-respiratory medical devices, including catheters of the cardio-respiratory category, and cancer care and radiotherapy medical devices, radiology and imaging medical devices (both ionising and non-ionizing radiation products), nuclear imaging devices, and all implants, including implantable electronic devices

Active Pharmaceutical Ingredients

1. The Indian government has approved the Production Linked Incentive (PLI) Scheme to promote domestic manufacturing of essential Key Starting Materials (KSMs), Drug Intermediates (DIs), and Active Pharmaceutical Ingredients (APIs) in India.
2. The Scheme’s objective is to become self-sufficient and reduce reliance on essential KSMS, DIs, and APIs. Depending on committed investments and sales of approved products produced by selected applicants, financial incentives of up to 15,000 crores would be offered under the scheme.

Export and Import of Analysis of Pharmaceuticals and Electronic Manufacturing before and after implementation of Production linked incentives

Active Pharmaceutical Ingredients and Medical Equipment 

Export

Year	Chemical & Derivatives	Medical Equipment	Chemical & Derivatives (y-o-y Growth)	Medical Equipment    (y-o-y Growth)
2009-2010	72013.21	764.61	–	–
2010-2011	90565.23	1062.56	26%	39%
2011-2012	124056.98	1380.55	37%	30%
2012-2013	128839.76	1518.6	4%	10%
2013-2014	137798.66	1562.96	7%	3%
2014-2015	132281.28	1686.34	-4%	8%
2015-2016	105120.52	1640.46	-21%	-3%
2016-2017	106529.57	1889.58	1%	15%
2017-2018	118646.08	2273.41	11%	20%
2018-2019	136640.58	2323.96	15%	2%
2019-2020	128270.78	2366.49	-6%	2%
2020-2021	112483.18	2225.41	-12%	-6%
2021-2022	177313.24	2903.04	58%	30%
2022-2023	199519.88	3731.96	13%	29%

From 2010 to 2020, the country experienced an average yearly export growth of 7% for chemical derivatives and 13% for medical equipment following the adoption of the first government programme.

Source: Authors Calculations

The country had an average yearly growth of 19 per cent for chemical derivatives and 18 per cent for medical equipment in the export industry when the government implemented the production-linked incentive programme in 2020.

Import

Year	Chemical & Derivatives	Medical Equipment	Chemical & Derivatives (y-o-y Growth)	Medical Equipment    (y-o-y Growth)
2009-2010	121844.27	2604.66	–	–
2010-2011	149112.9	3205.71	22%	23%
2011-2012	210117.5	4113.29	41%	28%
2012-2013	218919.49	4291.76	4%	4%
2013-2014	218014.76	4156.11	-0.4%	-3%
2014-2015	196718.29	4283.47	-10%	3%
2015-2016	138925.85	4176.62	-29%	-2%
2016-2017	140180.95	4398.06	1%	5%
2017-2018	172491.33	5340.29	23%	21%
2018-2019	213953.38	5895.05	24%	10%
2019-2020	199443.32	5728.69	-7%	-3%
2020-2021	148725.08	5085.77	-25%	-11%
2021-2022	260520.88	7267.02	75%	43%
2022-2023	320017.36	7901.47	23%	9%

From 2010 to 2020, the country experienced an average yearly growth in imports of 7% for chemical derivatives and 9% for medical equipment following the adoption of the first government programme.

The country had an average yearly rise of 24 per cent for chemical derivatives and 13 per cent for medical equipment in the import sector when the government implemented the production-linked incentive programme in 2020.

Source: Authors Calculations

Electronic Manufacturing

Export

Year	Heavy Machinery	Heavy Machinery (y-o-y Growth)
2009-2010	25948.52	–
2010-2011	38031.52	47%
2011-2012	46108.89	21%
2012-2013	44049.49	-4%
2013-2014	47416.23	8%
2014-2015	52387.38	10%
2015-2016	47397.94	-10%
2016-2017	49032.79	3%
2017-2018	54207.85	11%
2018-2019	64138.67	18%
2019-2020	63556.75	-1%
2020-2021	57355.25	-10%
2021-2022	76922.84	34%
2022-2023	89694.34	17%

From 2010 to 2020, the country’s exports of heavy machinery increased by 10% on average a year after the first government strategy was put into place.

Source: Authors Calculations 

Manufacturers of heavy machinery for export experienced an average yearly growth of 14% when the government implemented the production-linked incentive scheme in 2020.

Import

Year	Heavy Machinery	Medical Equipment
2009-2010	63608.46	–
2010-2011	76258.59	20%
2011-2012	95914.71	26%
2012-2013	92810.5	-3%
2013-2014	84205.7	-9%
2014-2015	87799.67	4%
2015-2016	91394.57	4%
2016-2017	96333.66	5%
2017-2018	111942.02	16%
2018-2019	124578.95	11%
2019-2020	121464.1	-3%
2020-2021	105505.11	-13%
2021-2022	137168.35	30%
2022-2023	155058.19	13%

We can observe that from 2010 to 2020, imports of heavy machinery manufacturing increased by an average of 7% annually after the first government programme was put into place.

Heavy machinery manufacture in the import sector grew by an average of 10% annually when the government implemented the production-linked incentive plan in 2020. 

Source: Authors Calculations

Conclusion

India’s government policies had a big impact on export and import growth rates in several sectors between 2010 and 2020. After the production-linked incentive (PLI) programme was implemented in 2020, the average annual export growth for the chemical derivatives sector grew to 19%. Prior to 2020, the medical equipment sector saw average annual export growth of 13%; when the PLI plan was put into place, this growth climbed to 18%.

From 2010 to 2020, the imports of chemical derivatives increased by 7% per year on average, but following the implementation of the PLI programme, that rise increased to 24%. Prior to 2020, the medical equipment sector saw average annual import growth of 9%; after the implementation of the PLI plan, this growth increased to 13%. From 2010 to 2020, the industry that makes heavy machinery saw an average annual export growth of 10%; however, after the PLI plan was implemented, this growth climbed to 14%.

India nevertheless continues to rely on imported active medicinal components. Many APIs are dependent on imports because the pharmaceutical industry has mostly concentrated on formulation and the creation of generic drugs. India has become a major player in the global generic medication market as a result of a sharp increase in pharmaceutical exports.

India has become a major player in the global generic medication market as a result of the country’s huge increase in pharmaceutical exports. This is a result of India’s dedication to excellence and adherence to global quality standards. The most recent programmes have improved domestic production, but India still has a long way to go in terms of the value added by the manufacturing industry to the Indian GDP, which is currently only between 16 and 18%. India still has a long way to go before being completely self-sufficient in terms of manufacturing, but the introduction of PLI was the proper first step. India has enormous economic potential and the potential to become a global manufacturing powerhouse, despite stiff competition from other Asian nations like Vietnam and South Korea.

About the Author 

Aryan Govindakrishnan is a second-year student at the Jindal School of Government School and Public Policy, pursuing Masters in Economics. His research interests include finance policy and economics.

Image Source: Google Images