Can PLI scheme take flight across sectors?

PLI scheme in India
The PLI scheme has boosted electronics manufacturing, but needs a more nuanced approach to unlock its full potential.

The Production Linked Incentive scheme was introduced by the Union government in March 2020 to boost domestic manufacturing, reduce import dependency, and make India a global manufacturing hub. While the scheme has seen significant success in certain sectors, notably electronics manufacturing, its performance has been uneven across other sectors. With the government’s upcoming budget review and potential expansion of the PLI scheme, it is imperative to assess its current state and explore necessary reforms to enhance its effectiveness.

The PLI scheme was initially launched for three sectors—mobile manufacturing and electric components, pharmaceutical, and medical device manufacturing. Encouraged by its early success, particularly in electronics manufacturing, the scheme was expanded to cover 14 key sectors, including textiles, automobiles, and pharmaceuticals. According to recent reports, the scheme has attracted over Rs 1.07 trillion in investments and generated substantial employment and exports.

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PLI scheme: The bright spots

Electronics manufacturing, especially smartphones, has been the standout performer under the PLI scheme. The presence of major players like Apple and Samsung has significantly boosted production and exports. Apple’s production in India doubled to $14 billion in FY24, making the country a key player in its global supply chain. This success can be attributed to the tailored approach taken by the government, which involved extensive consultations with industry leaders like Apple.

While electronics manufacturing has seen substantial success, other sectors such as IT hardware have struggled to replicate this performance. The initial assumption that the same strategies used for smartphones would work for IT hardware proved flawed. This sector required a different approach, and it was not until 2023 that the government reworked the scheme to better suit the industry’s needs. The example of IT hardware underscores the necessity for tailored strategies across different sectors rather than relying on a uniform approach.

The pharmaceutical sector, a critical area for India, has also benefited from the PLI scheme. Investments in active pharmaceutical ingredients (APIs) and key starting materials (KSMs) have strengthened India’s position as a global supplier of generic drugs and vaccines. This move has reduced the sector’s vulnerability to supply chain disruptions and bolstered self-reliance. However, despite these positive developments, the pharmaceutical sector still faces challenges, particularly in attracting sufficient private investment.

The government recognises this issue and is considering extending the tenure of the PLI scheme for bulk drugs to 2028-29 from 2027-28. This extension aims to provide a longer runway for companies to ramp up their production capabilities and fully capitalise on the scheme’s benefits.

Challenges and the need for reform

Despite these successes, other sectors have not shown the same level of progress. Reports indicate that sectors like textiles, steel, and automobiles have faced slower-than-expected growth. This disparity highlights the need for a more nuanced approach to the PLI scheme.

One of the key issues identified is the delay in processing incentive claims, which are currently disbursed annually. Switching to a quarterly disbursement system could cut down delays and provide more timely support to companies, thereby fostering continuous growth and investment throughout the year. Moreover, shifting to a quarterly disbursement model not only accelerates the incentive process but also aligns more closely with the business cycles of many companies.

This change is expected to enhance cash flow management for businesses, allowing them to reinvest more quickly and effectively in their operations. The proposed quarterly disbursement is anticipated to streamline administrative processes and reduce bureaucratic bottlenecks, thereby making the scheme more attractive to potential investors.

The PLI scheme’s one-size-fits-all approach has not worked uniformly across sectors. Tailoring incentives to meet the specific needs and dynamics of each sector is crucial. For instance, the success in electronics manufacturing was largely due to the customised approach taken with major players like Apple. Similar sector-specific strategies should be developed for other industries, considering their unique challenges and opportunities. In particular, the textile sector has struggled to gain momentum under the current PLI framework.

The ministry of textiles has been advocating for increased flexibility within the scheme, including the addition of more product lines to attract a broader range of applications and investments. This sector-specific adjustment aims to rejuvenate the textile industry by accommodating its unique production cycles and market demands, ultimately fostering a more competitive and dynamic manufacturing environment.

The government is considering new PLI schemes for labour-intensive sectors such as apparel, toys, and footwear. These sectors have the potential to create significant employment opportunities and drive economic growth. A focused approach to incentivising these industries can help achieve the dual goals of job creation and industrial development.

Challenges such as lack of uniform criteria, ambiguity in reward systems, and the absence of a centralised database hinder the scheme’s implementation and transparency. Establishing clear guidelines, maintaining a centralised database, and ensuring consistent criteria across sectors can improve the scheme’s effectiveness and attract more investment. Additionally, enhancing the transparency of the PLI scheme requires a robust mechanism for tracking and reporting progress.

The establishment of a centralised database would facilitate real-time monitoring of investment flows, production increments, and incentive disbursements. This database should be accessible to both policymakers and the public, fostering accountability and enabling data-driven adjustments to the scheme. Clear, consistent criteria across all sectors will ensure fairness and predictability, encouraging more companies to participate and invest in the initiative.

High raw material costs and supply chain inefficiencies are other significant challenges. For example, container manufacturing in India is more expensive compared to China due to the higher cost of corten steel. Addressing such issues through policy support and infrastructure development is essential to enhance competitiveness.

The PLI scheme has demonstrated its potential to transform India’s manufacturing landscape. However, to maximise its impact, a strategic overhaul and targeted expansion are necessary. By addressing current challenges and tailoring incentives to the specific needs of each sector, the PLI scheme can drive sustained economic growth, reduce import dependency, and position India as a global manufacturing powerhouse. The upcoming budget review presents a crucial opportunity to implement these reforms and ensure the scheme’s long-term success.