Production Linked Incentives: Driving Growth and Innovation in India

Introduction

The Ministry of New and Renewable Energy, Government of India, has launched the Production Linked Incentive (PLI) Scheme under the National Programme on High Efficiency Solar PV Modules. With a budget of Rs. 24,000 crore, this initiative aims to establish Giga Watt (GW) scale manufacturing capacity for high-efficiency solar PV modules. Manufacturers selected through a transparent process will receive incentives for five years post-commissioning, based on production and sales of these modules.

The scheme's objectives include reducing India's dependence on imports in the renewable energy sector by developing substantial manufacturing capacity for high-efficiency solar PV modules and introducing advanced technology. The scheme promotes integrated manufacturing plants for quality control and competitiveness and seeks to establish a local supply chain, boost employment, and achieve technological self-sufficiency.

Sectoral Coverage and Allocation

By November 2023, the PLI scheme had attracted investments exceeding Rs. 1.03 lakh crore, resulting in production and sales worth Rs. 8.61 lakh crore and creating employment for over 6.78 lakh people. While the 14 sectors already included have benefited significantly, concerns remain about limited job creation in some areas. Deloitte’s Rajat Wahi highlighted the potential for job growth in sectors like leather, garments, handicrafts, and jewelry, which could significantly benefit lower-income households.

Key Sectors under the PLI Scheme

Auto Components

The Union Cabinet, chaired by Prime Minister Narendra Modi, announced the PLI Scheme for the Automobile and Auto Components sectors with an outlay of $3.5 billion. The scheme offers financial incentives of up to 18% to boost domestic manufacturing of advanced automotive technology products. Incentives are applicable for products manufactured in India from April 1, 2022, for five consecutive years.

Aviation

The government approved the PLI scheme for drones and drone components as a follow-up to the liberalized Drone Rules, 2021. The scheme aims to stimulate growth in the drone sector with a total incentive of INR 120 crore, capped at INR 30 crore per manufacturer.

Chemicals

Approved on May 12, 2021, the PLI Scheme for Advance Chemistry Cell (ACC) Battery Storage aims to establish a manufacturing capacity of 50 GWh over five years. The scheme seeks to enhance India's manufacturing capabilities and exports by incentivizing large domestic and international players to set up competitive ACC battery production facilities.

Electronic Systems

The Union Cabinet approved PLI schemes for large-scale electronics manufacturing and IT hardware, aiming to boost India's manufacturing capabilities and exports. These initiatives support the Aatmanirbhar Bharat vision by fostering a strong ecosystem for producing globally competitive mobile phones, IT hardware products, and components.

Food Processing

The PLI Scheme for food products aims to boost India's manufacturing and export capabilities. It has approved 158 applications, including 22 MSMEs focused on millet-based products. The scheme is expected to expand food processing capacity by nearly INR 30,000 crore and generate approximately 2.5 lakh jobs by 2026-27.

Medical Devices

The PLI Scheme for Medical Devices has approved 26 projects with a committed investment of INR 1206 crore (~$147 million). The scheme aims to make India a global hub for manufacturing and innovation in the MedTech industry.

Metal and Mining

The PLI Scheme for Specialty Steel aims to boost manufacturing and exports under the Atmanirbhar Bharat initiative. The Ministry of Steel has signed 57 MoUs with 27 companies, expecting an investment of around INR 30,000 crore to create an additional 25 million tons of specialty steel capacity over the next five years.

Pharmaceuticals

The PLI Schemes for the pharmaceuticals sector aim to enhance domestic manufacturing, particularly of high-value products.

PLI Scheme for Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs) (PLI 1.0): Targets increasing local production of 41 critical bulk drugs. So far, 51 projects have been selected, with 22 commissioned by January 31, 2023. Investments have reached INR 2019 crore, creating 1900 jobs.
PLI Scheme for Pharmaceuticals (PLI 2.0): Supports pharmaceutical production with 55 applicants selected, including 20 MSMEs. By January 31, 2023, these applicants reported sales of INR 36,000 crore, invested INR 16,199 crore, and created 23,000 jobs in the first year.

Economic Impact

Introduced at the onset of the COVID-19 pandemic, the PLI scheme played a key role in helping India recover from the economic impact of lockdowns and supply chain disruptions. Although the rollout was delayed, early results are promising. By November 2023, the scheme had attracted investments exceeding INR 1.03 lakh crore, generated exports worth INR 3.20 lakh crore, and created over 600,000 jobs. Beneficiaries range from MSMEs to larger corporations, significantly reducing India's dependency on imported raw materials in industries such as pharmaceuticals.

Challenges and Criticisms

Complex Regulatory Framework

The PLI scheme is entangled with elaborate eligibility requirements and investment rules, making it susceptible to becoming as cumbersome as the old 'licence raj' system. This complexity might hinder smooth implementation.

Inadequate Budgetary Support

Despite grand announcements, the actual financial backing has been modest, affecting the scheme’s effectiveness across various industries.

Sectoral Concerns

Inconsistencies in the scheme's application across different industries could hinder achieving economies of scale, particularly in sectors such as pharmaceuticals and electronics.

Policy Recommendations

Assessing PLI Effectiveness

The government needs to evaluate the effectiveness of the PLI scheme by examining metrics like job creation and cost-effectiveness per job, and identifying reasons for its limited success.

Expanding the Scheme to New Sectors

Before extending the scheme to additional sectors, it is crucial to thoroughly understand its limitations and address the underlying issues that may hinder its success.

Conclusion

The Production Linked Incentive (PLI) scheme launched by the Government of India offers performance-based incentives to companies for increased sales of domestically manufactured products. This initiative aims to boost the manufacturing sector and reduce reliance on imports, promoting the "Make in India" initiative and encouraging foreign and domestic manufacturers to expand production and exports. With an allocation of Rs. 1.97 lakh crore (US$28 billion) across 13 sectors, the scheme's long-term impact on India's economy and job market remains promising.

References

Ministry of Electronics and Information Technology
Drishti IAS
Invest India
Press Information Bureau

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