Industrial policy has made a comeback recently, and India is no exception. The Production-Linked Incentive (PLI) scheme is India’s most significant yet, spanning 14 sectors with an outlay of Rs 1.97 lakh crore. The PLI scheme incentivises companies to manufacture in the country by giving them subsidies based on the value of the goods they manufacture. However, their success has been mixed, to say the least. A recent report in the Indian Express sought the jobs generated by these schemes. Only four sectors have achieved their targets, two have achieved half, and the other seven are nowhere close. So what’s the problem? Production-linked incentives alone do not and cannot solve the issues that all these sectors have.
Questioning the Sector Selection
Under the PLI schemes, the government provides money upfront for companies to invest in land, labour, capital, etc, to set up manufacturing facilities in the country. The reasoning can be that the production cost in the country is high, so the government subsidises some of the cost to allow companies to be competitive. The cost of production can be high for various reasons, including costly inputs (land, labour, capital), costly compliance, etc. These reasons can apply to any sector. Then why were these 13 ones chosen in the first place?
The initial notification said two sectors were chosen - strategic and sunrise. The government stated these schemes aimed to promote 'Aatmanirbharta' (self-reliance), make Indian companies globally competitive, reduce import dependence and create global manufacturing champions. However, some sectors don't fit either category. Our analysis finds that of the 13 industries chosen, two were selected for strategic reasons, three are probably sunrise sectors, and five were selected to reduce import dependence (mostly on China). There was no clear rationale for the four sectors. Electronics manufacturing could have been chosen for import dependence or strategic purposes. Food processing could be placed under sunrise sectors, but the reasoning isn’t clear. This analysis suggests that most sectors were selected primarily to reduce the country’s import dependence. However, this still doesn’t explain why India is so reliant on the imports of these goods. To assess whether the policy intervention is appropriate, we need to understand the root causes of this dependence.
Matching the problems and their interventions
Logically, sunrise sectors should be supported for R&D and innovation. The PLIs don’t do that; they only incentivise production. Some schemes have local value addition (LVA) requirements for companies. Studies have shown that LVA requirements are generally unsuccessful in increasing long-term value addition. It can be argued that such requirements might induce companies to invest more in R&D, but there are better and more direct ways. The government, being the buyer of first resort, is one. DARPA and Bell Labs from the US are great examples of this. A study by Mashelkar, Shah and Thomas shows how India can do it, too, by contracting out research and development requirements to companies with the assurance of buying them. Another study on the PLI schemes suggested that incentives should be based on efficient costs or prices to drive value addition.
Most of the PLI schemes want to solve for import dependence in sectors like electronic goods, telecom equipment, and medical devices. Again, the design of the PLIs doesn't address the fundamental reasons for import dependence - lack of technological capabilities, weak supplier networks, and infrastructure gaps. Instead of focusing on sales targets, these sectors need policies oriented toward global value chain (GVC) integration. Research on GVC integration suggests that alignment with trade blocs like IPEF and targeted infrastructure development would be more effective. Another great way to do that is to increase FDI. This allows existing companies to bring their manufacturing and, hence, a part of the GVC to the country. The PLIs should focus more on FDI attraction, supported by the 2020 reforms. The schemes' performance in attracting FDI has been mixed. While the automotive sector has succeeded, non-PLI sectors, mainly services, have performed better in attracting foreign investment. This suggests that fundamental factors like market size and ease of business play a more crucial role than production incentives.
The challenges are entirely different for sectors dominated by small and unorganised firms like food processing. The primary issues are SMEs' unorganised nature, technological backwardness, lack of quality standards, and poor market linkages. Thailand's success offers valuable lessons. Their cluster-based approach (which India has attempted with the SEZs) focused on creating food innovation hubs and integrating small producers into organised supply chains. Similarly, Vietnam's SME support program demonstrates how targeted interventions like business development support, tax breaks, and matching companies with real estate in business parks can transform traditional sectors.
Take the pharmaceutical sector. India has achieved enough scale in pharma production, with almost 6% of the global trade. A big problem is quality control. Here, Singapore's experience is instructive. Their pharmaceutical sector development program focused on building a comprehensive quality management system backed by strong regulatory support and R&D incentives. Instead of simply incentivising production, India needs to strengthen its quality infrastructure and regulatory framework.
What’s The Way Forward?
Looking ahead India needs to move beyond the current PLI framework toward more nuanced, sector-specific interventions. For import-dependent sectors, this means focusing on technology acquisition and supplier development. For traditional sectors with small firms, the emphasis should be on clustering and quality upgrading. R&D support and public procurement would be more effective tools for sectors requiring innovation. PLIs represent an essential step in India's industrial policy journey. However, their limited success highlights the need for a more sophisticated approach that matches policy instruments to sector-specific challenges. Good industrial policy is targeted towards the specific problems facing the industry. Production-linked incentives can be helpful in the proper contexts, but a one-size-fits-all model doesn’t work. The government needs to identify the sector's needs the proper policy intervention and do some match the following.
PLIs can help companies establish manufacturing capabilities in India. Once these companies have set up shop, it will be difficult for them to relocate. However, the next step should focus on moving more parts of the value chain to India to generate greater returns. PLIs alone won’t be enough to make this happen. The next phase must prioritise innovation, value addition, and GVC integration. We must also sort finance, trade, and labour policies for it.
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