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Picture Courtesy: THE HINDU

Context:

The Union government has decided to let lapse a $23 billion Production-Linked Initiative (PLI) scheme to incentivize domestic manufacturing.

About the Production-Linked Incentive (PLI) Scheme

It was launched in March 2020, to boost domestic manufacturing and create jobs.

It incentivizes companies by offering financial rewards based on their incremental sales or production. 

The goal was to raise the share of manufacturing in the economy from 15.4% to 25% by 2025 .

It aims to reduce dependency on imports, promote self-reliance under the "Atmanirbhar Bharat" mission, and make India a competitive player in global supply chains.

Which sectors were included in the PLI scheme?

The PLI scheme covered 14 sectors , including pharmaceuticals, mobile phones, steel, textiles, solar panels, and food processing. While some sectors saw success, others struggled significantly.

• Pharmaceuticals and Mobile Phones: These sectors performed exceptionally well. Pharmaceutical exports nearly doubled to $27.85 billion in 2023-24 compared to a decade ago. Mobile phone production increased by 63%, reaching $49 billion in 2023-24.
• Solar Panels, Steel, and Textiles: These sectors faced challenges. For example, in the solar industry, eight out of twelve participating companies are unlikely to meet their targets. Reliance Industries, for example, is projected to achieve only 50% of its target by 2027. Adani Group has not ordered necessary equipment, while JSW has made no progress.
• Food Processing: Some food-sector companies did not receive subsidies due to non-compliance with investment thresholds or failing to meet growth targets.

Overall, as of October 2024, participating firms produced goods of value  $151.93 billion, which is just 37% of the target. India expended only $1.73 billion in incentives—less than 8% of the allocated funds .

Why is the PLI scheme being allowed to lapse?

The Union Government decided to let the PLI scheme lapse after facing challenges. Several factors contributed to this decision:

• Missed Deadlines: Many firms failed to kickstart production within the stipulated timelines.
• Delayed Subsidy Payments: Companies that met their targets complained about slow disbursement of subsidies.
• Red Tape and Bureaucratic Hurdles: Excessive regulations and bureaucratic caution hindered the scheme’s effectiveness.
• Underperformance in Key Sectors: Sectors like solar panels, steel, and textiles lagged behind targets, with several projects withdrawn due to lack of progress.

The government concluded that extending the scheme beyond its original scope would provide an unfair advantage to underperforming companies. Instead, new strategies are being analysed to support manufacturing.

How does the failure of the PLI scheme impact India’s economic ambitions?

Since the introduction of the PLI scheme, the share of manufacturing in the economy decreased from 15.4% to 14.3%.

India faces increased pressure from U.S. President Donald Trump’s trade policies. Trump’s threats of reciprocal tariffs on countries with trade surpluses over the U.S., including India, mean that exports—a key driver of manufacturing growth—are increasingly challenged. Reduced tariff protections also complicate the matter for India.

Alternatives to the PLI scheme

Partially compensating investments made to set up plants, this could address complaints about delayed payouts and bureaucratic hurdles.

By focusing on upfront financial assistance, the government expects to attract more foreign investment and encourage quicker project implementation.

What lessons can be learned from the PLI scheme’s performance?

The PLI scheme offers several important lessons:

• Realistic Target: Excessively ambitious targets led to underperformance in many sectors.
• Streamlined Processes: Excessive red tape and bureaucratic delays suppressed progress. Faster subsidy disbursements could improve participation rates.
• Sector-Specific Strategies: Success stories in pharmaceuticals and mobile phones highlight the significance of incentives to industries where India already has a competitive advantage.
• Global Competition: India must address cost disadvantages and infrastructure gaps to compete against rivals like China.

While the PLI scheme had both hits and misses, it highlights the need for innovative solutions to make India a viable alternative to China in global manufacturing.

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Source: 

THE HINDU