Will PLI schemes lead to a manufacturing renaissance?

Scheme Begins To Deliver 

The success of the PLI scheme in augmenting India’s manufacturing is most visible in electronics, which has seen a multi-fold jump in exports (25 percent increase on a three-year CAGR basis by FY23), led to healthy employment generation and catalysed parallel investments outside the PLI scheme in mobile components. The solar and auto PLI projects also look promising, as gauged by strong participation. The auto PLI has, however, run into some contention regarding domestic value addition, which is likely to be sorted out in the coming months. Product choices of pharma PLI could have been more exhaustive and incentives more remunerative. The PLI scheme in telecom, food processing and white goods has received a decent response.

A second round of incentives announced for IT hardware in June 2023 saw easing of the investment criteria, increased incentive rate and government support conditional on the degree of localisation, likely making the scheme more attractive.

A policy cannot be foolproof and devoid of any shortcomings. Product choices could have been more comprehensive or exhaustive for specialty steel, key starting material/active pharmaceutical ingredient and telecom instruments. On the other hand, some of the products within food processing, white goods and auto could have very well been omitted given a healthy natural progression of investment outside the PLI scheme. Given the low subsidy payout for specialty steel, aggressive capex and production targets for technical textiles and stringent localisation criteria for advanced chemistry cell battery storage, there is reservation around the success in these three sectors. The PLI scheme in semiconductors has seen just one awardee in June 2023 and still awaits more meaningful participation.

It is early to bring out a scorecard on the PLI scheme yet, but eventually, the scheme’s success would be measured in terms of (a) rise in manufacturing sector share in India’s GDP from the current 15 percent, (b) increased manufacturing sector capex, (c) higher FDI inflow and (d) reduced trade deficit; and all of this without compromising India’s fiscal position.

The fiscal cost appears contained. The planned Rs 5 trillion capex is 1.7 percent of FY23 GDP and ~14 percent of FY23 corporate capex. The quantum may not be meaningful but could help catalyse investments in various related intermediaries and components. As of now, it appears that the PLI scheme may have a limited impact in attracting global manufacturing players. At the initial stage, the PLI scheme has been successful in increasing manufacturing and reducing the trade deficit for electronics and telecom. In the near-term, expansion of the manufacturing capacity could drive the import bills and trade deficit higher. In the long run, it could be instrumental in increasing manufacturing activity and sustainably reducing the current account deficit in India a few years down the line.

Challenges To Making In India 

The challenges to the PLI scheme and overall manufacturing sector momentum cannot be ignored. Intense competition from other nations will keep challenging India’s manufacturing sector. A change in the political regime, if it were to happen, could change the way the entire policy is thought of. Despite a fast track on government clearances for industrial projects in recent years, difficulties in land acquisition and environment clearance remain obstacles to select cases. The scheme will also need to be mindful of dynamic demand conditions in a sector which could reduce the capex enthusiasm.

India is witnessing its manufacturing sector moment aided by multiple factors such as increased investment in physical and digital infrastructure over the last decades, multiple taxation reforms, focus on ease of doing business, and bigger businesses with deleveraged balance-sheet enabling their ability to undertake capex. The PLI scheme could be an important catalyst for this momentum. In order to make the policy more attractive and increase private sector participation, the government has not hesitated to go back to the drawing board and finetune the scheme guidelines. Success stories, even in a few sectors, can have a significant impact on Indian macro, export, and overall current account dynamics over the next 5-10 years. India needs to extend its competitive advantage beyond pharma, chemicals and IT services and the PLI scheme could provide the necessary push.

Namrata Mittal is Chief Economist, SBI Mutual Fund. Views are personal, and do not represent the stand of this publication.