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Synopsis: The Production-Linked Incentive scheme must drive learning to compete, not manufacture.
The Production-Linked Incentive (PLI) scheme has arose fresh interest in investing in domestic manufacturing.
The scheme goes together with tariffs, on the finished product and often on the components involved. For example, Mobile phones have over the last three years been subject to an import duty of 20%. This has prompted most phones sold in India to be locally made, in one of the 270 mobile phone factories, up from two in 2014, in the country today.
What is the objective of the PLI scheme?
The PLI scheme aims to strengthen local supply chains with a subsidy on their components by providing a subsidy (typically 4-6 per cent of sales) for firms in 13 sectors to make a list of “desirable” end products, components or assemblies. It will cost Rs 2 trillion (around 1 per cent of gross domestic product, or GDP) over five years.
Over time scheme shall promote greater competitiveness in Indian industry.
What should be done to make PLI scheme a success?
Ensure that all conditions attached to the scheme such as export commitments are honored for the subsidy to be paid. Ignore, other industries asking for their own PLI scheme. In short, remove any further scope for bureaucratic discretion.
Make achievement transparent, and publish the results. Let all know which firms have won which contracts for what committed volume, and how each is doing in adhering to the terms of the contract.
Investment in R&D: Local production must lead to greater competitiveness, which in turn is about building technical capability. That requires learning how to manufacture efficiently, and learning how to further develop product technology. So, investment in R&D is essential to long-run competitiveness in these 13 technology-intensive fields.
R&D effort is essential, but it must be focused on innovation, not indigenisation. For instance, in 1970s an excessive focus on indigenisation led directly to a lack of competitiveness. Prime focus on indigenisation forced Indian industry to learn things that were both useful and useless. Ensuring that learning is useful means choices of which component to make in-house, source locally, or import must be made on purely commercial grounds by the firm itself.
Govt should be clear with the duration of the scheme i.e., for five years and there will be no extension. No company should have any doubt. Accompany that with a graded reduction in all tariffs on the finished product and the components going into it such that by 2025, all these products must be able to compete without protection.
Source: This post is based on the article “What is PLI for?” published in Business Standard on 21st October 2021.