PLI Scheme Likely To Deliver ‘Less, Not More’ Than Envisaged

The Covid-19 pandemic laid bare the vulnerabilities of our supply chains, as well as the shortage of essential products. It renewed and rightly so, a sense of emergency for the Atma Nirbhar Bharat initiative.

*Rekindling the ‘Make in India’ dream. Not enough traction though

The policymakers put together plans and programmes to make India self-reliant in key products, across critical areas. The government augmented, by unleashing the PLI (Productivity Linked Incentive) scheme, incentives for organisations to increase their productivity and competitiveness. The government has committed about Rs 2.5 lakh crores, across 14 significant sectors.

The larger goal of the government via the PLI scheme is to boost manufacturing, generate employment, amplify growth, increase exports and diminish import dependencies. The objective is to expand the contribution of the manufacturing sector to a fourth of the GDP. Now it is a sixth.

The long-term goal is to enhance competitiveness and use the ‘developed’ manufacturing ecosystem to attract and encourage foreign investors to inject capital and eventually ‘make’ in India. Over the next five years it is expected to generate about two crore new jobs.

The private capex potential stands at over Rs 5 lakh crores, depending on the sector where the PLI is injected. As an example, electronics, particularly mobile phones, enjoy a PLI to capex ratio of 4, while capex-heavy businesses like automobiles batteries etc. will yield lower multipliers.

The incentives ‘doled’ out earlier indicate that these schemes are not a panacea, and normally do not move the needle in the absence of enablers. The early indication is that the PLI schemes are a ‘policy shortcut’.

It is time to ask some hard questions.

*Lack of homework. PLI, other subsidies work under ‘enabling’ ecosystem

The government has yet to create a common parameter or a mechanism to measure the value additions from the incentives provided. The index is neither accurate nor robust enough to determine various deliverables like the number of jobs created, rise in exports and quality improvement. The PLI schemes can be complex and may require significant resources to implement and administer. There are instances of the beneficiaries focusing on ‘achieving’ targets and not on enhancing sustainable competitiveness. The other, and equally more important question is its time frame. ‘Sunset’ is vague. Questions abound about the productivity and its yield; many continue to believe that despite the PLI, imported material is still cheaper.

This is discomforting.

The PLI incentive structure favours capital-intensive growth at the cost of labour, deepening the unemployment crisis. It suffers other faults. The stimulus is generic, not customised; lumps dissimilar enterprises, clubs unrelated industries, and geographies. It diminishes impact. Larger and top decile entities capture 80 per cent of the benefits; smaller ones, particularly the MSMEs are left with crumbs, accentuating the gap.

The bad news turns ugly.

*History indicates subsidies end badly

Subsidies over the last three decades (zero tax and tax holidays, exemptions, deductions, rebates, deferrals, and credits) have not created the desired impact. In the absence of an enabling ecosystem, they don’t. Contribution of manufacturing to the GDP has stagnated at 16 per cent. The employment share of the sector has fallen to less than a tenth and has halved in the last five years.

Most economies ‘manufacture’ their way to development and prosperity. India may not.

Despite the ‘Make in India’ pitch India’s ecosystem is much too frail and the support system too disjointed to emerge as the factory to the world. It’s just an ambition. We are years away from becoming (if ever) the ‘factory’ of the world and may even have missed the manufacturing export opportunity. Our erudite readers know too well that automation has reduced manufacturing jobs. The growth to jobs correlation has weakened i.e., that for every percentage of growth in the manufacturing sector, the jobs grow only by 0.2 per cent. Earlier it was 0.4 per cent. Similar incentives to the job creating sectors will have a higher multiplier.

A Crux study titled ‘Growth & Jobs: Beyond Manufacturing’ is insightful. It highlights inherent challenges. As much as 80 per cent of the largest manufacturers ‘fail’ to export. Only a handful of these ‘large’ manufacturers have global scale and competitiveness. Even those serving niche markets have not built unsurmountable moats. They need help.

We need to align the mid-sized firms to the larger ones. This adds value, lowers cost, and enhances competitiveness for the larger players, yielding a symbiotic outcome. However, the ecosystem has ‘prevented MSMEs from growing to ‘middle’ sized; most do not grow beyond a ten people firm and as a result, are unable to contribute to the growth of the ecosystem.

*Several other plays, many other opportunities. Focus on strengths

Aping the China model is neither doable nor desirable. We must set higher goals, widen the landscape and work on our strengths. Our incentive schemes need better targeting and must focus on sectors that are job creators.

The apparel, leather, and footwear sectors are an ‘easy and lucrative’ market and the job factories. They empower demography and propel domestic consumption. The value-deprecating, resource-sapping regulatory framework nullifies India’s advantage of ‘low cost-low skilled’, labour-intensive sectors.

The Centre has a role to play. It must create an enabling, even nurturing economic climate and back it with efficient financial institutions. It must boost infrastructure, incentivise R&D and create robust laws. The government must stimulate and promote. It must brand our image, not only as a large but equally a reliable, quality-conscious market, to be able to attract more opportunities.

*States hold the baton, must usher in reforms

There is often a misconception that growth-driven activities are the responsibilities of the central government. 

The state governments have a profound, more visible act to perform, and must do most of the heavy lifting. Their actions impact the business environment up and close. Administrative reforms are a prerequisite to better contracts, ease of doing business and nurturing the ecosystem. Similarly, the state governments need to invest in infrastructure and skills.  

The private sector has a role to play. Our productivity is amongst the lowest among peers; equally quality too is a challenge. Similarly, we shy away from R& D investment and are laggards when it comes to adopting international standards. The large players need to invest in automation, technology, and other productivity-enhancing measures.