The Production-Linked Incentive (PLI) scheme has spawned fresh and welcome interest in investing in domestic manufacturing. It will cost Rs 2 trillion (around 1 per cent of gross domestic product, or GDP) over five years. The winds of current industrial policy continue to blow inward. Since 2017, we have raised tariffs on thousands of tariff lines, covering 60 per cent of items we import. Our simple average Customs duty of 17 per cent is now the highest of all emerging economies. PLI is meant to deepen domestic supply-chains and so, over time, promote greater competitiveness in Indian industry. Will it work?
The PLI scheme
provides a subsidy, typically 4-6 per cent of sales, for firms in 13 sectors to make a list of “desirable” end products, components or assemblies. Various industry ministries publish lists of items to indigenise. Firms propose items they will manufacture in a green-field or brown-field facility with a specified minimum investment that varies by sector and the size of a firm. The scheme goes together with tariffs, fairly high ones, on the finished product and often on the components involved. Some examples: Mobile phones have over the last three years been subject to an import duty of 20 per cent. This has prompted most phones sold in India to be locally made, in one of the 270 mobile phone factories, up from two in 2014, in the country today. But mobiles made in India have limited local value-addition — the number I’ve heard is around 10 per cent. PLI aims to deepen local supply chains with a subsidy on their components. Finished air-conditioners now attract a tariff of 25 per cent, with PLI schemes for manufacturing compressors, control units and other components, all protected by tariffs. Similarly, PLI incentivises local production of Active Pharmaceutical Ingredients that are needed to make drugs.
Illustration: Binay Sinha
These moves prioritise tariffs and import substitution over trade liberalisation and export promotion. In PLI, India is not alone. As The Economist pointed out earlier this year, governments in many countries, China and India among them, have dusted off the old idea of import-substituting industrialisation (ISI). The various PLI schemes bristle with words and phrases like “boost domestic manufacturing”, “indigenisation” and “localisation”. ISI was the prevailing agenda of our trade policy for the 20 years when Indira Gandhi dominated Indian politics. It did not work then. Will it work now?
Making PLI work
Local production must lead to greater competitiveness, which in turn is about building technical capability. That requires learning — learning how to manufacture efficiently, and learning how to further develop product technology. So investment in R&D is essential to long-run competitiveness in these 13 technology-intensive fields.
Industrial policy and construction equipment: Thirty years on, Ashok Desai’s Technology Absorption in Indian Industry remains one of the best books in the field. A chapter in the book compares the construction equipment industry in India and South Korea. Poclain of France licensed the technology to produce hydraulic excavators to L&T in 1973 and Hyundai in 1974. In 1983, the Korean firm made 630 excavators to L&T’s 70. Korean excavators sold for 125 per cent of the world price; L&T’s sold for three times the world price. It was not for want of trying or technical effort. L&T employed twice as many engineers working on excavators as did the Korean firm. But Indian government policy in the 1970s forced indigenisation above all else: L&T’s excavators had a domestic content of 70-80 per cent, to 40-60 per cent in Korea. An excessive focus on indigenisation led directly to a lack of competitiveness.
Consider an alternative route to success by fast-forwarding to 2021. The British firm JCB is everywhere in the construction equipment industry in India today. JCB has five factories in India, including its biggest worldwide. India is now its largest market, accounting for half of group turnover, and a higher share of profits. India is also its largest investment destination (a sixth factory focused on exports is coming up), and contains its largest design centre. JCB now uses India as a base for exporting to over one hundred countries, with exports up 300 per cent this year. Export success is the best affirmation of competitiveness there is. India’s manufacturing future should look like JCB — a remarkable Indian manufacturing success story without any PLI subsidy.
Our 1970s focus on indigenisation forced Indian industry to learn things that were both useful and useless. Ensuring that learning is useful means choices of which component to make in-house, source locally, or import must be made on purely commercial grounds by the firm itself. R&D effort is essential, but it must be focused on innovation, not indigenisation.
So what should we do now? I still believe we would have been better off without the PLI scheme, with the Rs 2 trillion it will cost us taxpayers spent on building infrastructure and improving logistics to make all of India more competitive instead of benefiting a few firms. But the scheme exists. PLI approvals have been granted for the great bulk of the schemes. It is a done deal. What can we do now to make the best of where we are?
Three things. Some firms have been arguing that the zero date should move forward by two years, so providing two more years of subsidy. Ignore them. Firms bid for the PLI scheme
with their eyes open; stick to the agreed contracts. Ensure that all conditions attached to the scheme — such as export commitments — are honoured for the subsidy to be paid. Ignore, too, other industries clamouring for their own PLI scheme.
In short, remove any further scope for bureaucratic discretion.
Second, make achievement transparent, and publish the results. Let all know which firms have won which contracts for what committed volume, and how each is doing in adhering to the terms of the contract.
And third, be clear of the sell-by date. No company should have any doubt about the duration of the scheme; it runs for five years and there will be no extension. Accompany that with a graded reduction in all tariffs on the finished product and the components going into it —such that come 2025, all these products must be able to compete without protection. Hopefully, PLI will have worked in developing deeper, and so more competitive, supply chains. But competing with the best in the world, at home and abroad, must be our sole metric for whether PLI has worked.
firstname.lastname@example.org. The writer is Co-Chairman Forbes Marshall, Past President, CII, Chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre
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