Synopsis–In an increasingly interconnected world, manufacturing has been transformed into a series of dependent processes across countries, which together form large GSCs. With GSCs slowly shifting towards the East, and due to constantly evolving geopolitical dynamics, there’s a great chance for India to capture certain segments by leveraging its strengths.
Indian manufacturing has long suffered because of its inability to scale up. India has been slow at adopting new technologies, and often been unable to gain an early mover’s advantage. As much as 70% of its exports are in the traditional segments, for which the world market has shrunk to about 30%. India should, instead, focus on sunrise segments, where there is an ample scope to grow and build a high market share.
India’s manufacturing companies must become an integral part of global supply chains (GSCs) by focusing on cutting-edge technology sectors. If India has to grow at high rates for the next three decades, it needs to focus on building a strong manufacturing base with global champions capable of producing for the world. Nearly all the countries that have transitioned from low to high per-capita income have managed this shift on the back of manufacturing and export-led growth.
The new Production-Linked Incentive (PLI) scheme is a game changer in this regard. It seeks to bring size and scale to India’s manufacturing capabilities and exports in key sectors, while creating and nurturing global champions. It incentivises increasingly enhanced production for a limited number of eligible anchor entities within a limited timeframe. The scheme is expected to generate an incremental production of $520 billion over its predefined timeline of five years.
Given that PLI has pre-committed levels of investment and production, and that it is time-bound, it cannot be labelled as either an investment or a subsidy scheme. It is different due to its clear mandate of selecting only the most eligible sectors that can attract maximum investments and scale rapidly to provide maximum returns in terms of incremental production, employment generation and exports. Also, it specifically avoids the risk of spreading available resources thinly — a mistake that prevented the Merchandise Exports from India Scheme (MEIS) from providing the expected boost to Indian exports.
With a focus on building a strong manufacturing segment, PLI is designed to identify and support upcoming technologies that are indicative of the largest economic opportunities of the next few decades. These include advance chemistry cell batteries, electronic and technology products, and solar photovoltaic modules. Robust large-scale manufacturing set-ups in these segments are essential for taking on Asian competitors that have made strong progress. These three sectors have an equally crucial role in bringing rural India into the mainstream grid of continuous electricity and high-speed digital connectivity.
Manufacturing in sectors such as automobile and auto components, pharmaceuticals, telecommunications, white goods and steel is rapidly becoming globally interconnected. These sectors are also important in terms of their strategic importance, contribution to GDP and employment-generation potential.
Finally, PLI aims to generate big-scale employment by focusing on the development of labour-intensive sectors such as food processing and textiles. The current export basket of these two segments consists of a large volume of low-value products. Encouraging large manufacturers to bring technology and build capabilities for high-value output is likely to rectify the situation by providing higher returns to upstream producers. It will also enable an increase in exports.
Beneficiaries of the PLI scheme are shortlisted on the basis of their commitment towards achieving scale, while meeting other specified performance parameters, such as minimum investments and minimum incremental production growth. The scheme is fully self-sustaining as the benefit is given to the selected company only after investment and production have taken place in India.
In an increasingly interconnected world, manufacturing has been transformed into a series of dependent processes across countries, which together form large GSCs. With GSCs slowly shifting towards the East, and due to constantly evolving geopolitical dynamics, there is a great opportunity for India to capture certain segments by leveraging its strengths and with dedicated support from GoI.
Kant is CEO, and Patil is public policy consultant, NITI Aayog
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