Production Linked Incentive Scheme: Unlocking untold possibilities

By Ishtiyaque Ahmed

A country’s transition from a lower-middle income economy to a higher-middle income one is subject to its ability to provide its labour force enough well-paying jobs. In contrast to most developed economies, the growth trajectory of GDP in India has favoured the services sector. In 1951, the contribution of the agriculture sector to the GDP was 53% while the industry and the services sectors  contributed 11% and 33%, respectively. With respect to employment in the country, the contribution of the primary, secondary and tertiary sectors stood at 72%, 11%, and 17%, respectively.

After Independence, the contribution of the agriculture sector continued to slide, and it was substantially replaced by the manufacturing and services sectors. In 2019, the share of the services sector in job creation was 32% against its contribution to the GDP standing at 54%. On the other hand, the share of the manufacturing and agriculture sectors in job creation was 26% (share in GDP: 17%) and 42% (share in GDP: 16%), respectively. From these figures, it is clear that even though the services sector has the maximum share in the GDP of the country, its share in job creation is low. This suggests that the services sector has not been able to absorb the surplus labour force from the agriculture sector.

The infallible conclusion is that the contribution of the manufacturing sector towards job creation has not met the expectations of policymakers. Investment in the manufacturing sector and increasing its share in the GDP can help absorb the excess labour from rural areas. We can attribute the stagnation of the manufacturing sector to many reasons, including cost of capital, land and power, labour productivity, poor investment in R&D, lack of size and scale, etc, which have led to a fair level of fiscal disability vis-a-vis our competitor economies. It became more economical for our industries and consumers to buy imported products, which, in effect, adversely impacted the manufacturing sector of the country.

Policymakers have undertaken several reforms to decrease the cost of production in India. Significant measures include the development of industrial infrastructure, improving ease of doing business, more liquidity to businesses, skilling, rationalising cost of power, developing world-class logistics, etc. These measures, in the times to come, will reduce the cost of production in the country. However, in the interregnum, certain measures are required to address the financial disabilities; the Production Linked Incentive (PLI) scheme is one such key intervention by the government. This has total a budgetary outlay of over Rs 1.96 lakh crore.

There are certain marked features of the PLI scheme that should make it effective in implementation and predictable in results. First, the scheme is outcome-based, which means that incentives will be disbursed only after production has taken place in the country. The scheme is thus purely result-oriented. Second, the calculation of incentives will be based on incremental production to be achieved at a high rate of growth. To achieve this incremental production, beneficiaries will be required to make additional investment in establishing green-field facilities or carrying out expansion of existing facilities. Third, the scheme focuses on size and scale by selecting those players who can deliver on volumes.

The targeted nature of the scheme will make it highly effective and the beneficiaries are likely to become globally competitive. Fourth, the selection of sectors covering cutting-edge technology, sectors for integration with global value chains, job-creating sectors and sectors closely linked to the rural economy, is highly calibrated. Overall, the scheme is designed to comprehensively cover not only sectors of strength but also sectors of opportunities where India can gain substantially in the coming years. Lastly, addressing fiscal disabilities of companies and helping them achieve size and scale would allow Indian products to become competitive in global markets and lead to an increase in exports.

The PLI scheme has been announced after intense stakeholder consultations. The scale of incentive for the entire scheme is over $26 billion, which can catalyse an enormous manufacturing output in the country. For instance, an incentive of ~$5 billion in electronics and mobile manufacturing will deliver an incremental production of over $140 billion in the next five years. Out of the aforementioned, nearly 60% will go as exports to overseas markets. PLI in other sectors will also trigger huge domestic production and result in exports. The manufacturing GDP of India currently stands at ~$480 billion. The country is ranked sixth after China, the US, Japan, Germany, and South Korea. With the PLI scheme in place, the additional incremental manufacturing output in the next five years will be more than a year of the manufacturing GDP of India.

To achieve the scale of the production envisaged under the PLI scheme, massive investments would be required in establishing factories, expanding additional facilities, on acquisition of plant and machinery, etc, which would result in a significant boost to employment opportunities in the country. This scheme can help increase the manufacturing sector’s share in the Indian GDP from the current level of 16% to much higher levels in the next five years. Moreover, this scheme would help India move towards becoming a higher-middle income economy, and the resultant economic spillover will create many employment opportunities.

(The author is Adviser, NITI Aayog. Views are personal.)