PLI schemes are being spread across too many sectors
The Union government’s production-linked incentive (PLI) schemes for various sectors are gathering momentum. It has been reported that 25 companies, including Nokia and Dixon Technologies, have registered for the telecom hardware PLI scheme, which is worth over Rs 12,000 crore and in which incentives are available for incremental sales up to 20 times what has been invested. Incentives from 4 to 15 per cent will also be available under the PLI scheme for the steel sector, costing Rs 6,300 crore and expected to be approved shortly by the Union Cabinet. And the scheme for advanced chemistry cell batteries — especially lithium-ion batteries — has also been notified, and is expected to cost Rs 18,000 crore, attracting an interest from Exide, Amara Raja Batteries, and Reliance Industries, among others.
This expansion of the PLI mechanism is being undertaken without sufficient thought or a strategic plan. Already, many attempts have been made by those who have benefited from previously notified PLI schemes, including in electronics (worth over Rs 40,000 crore) to relax agreed-upon targets. A panel led by Cabinet Secretary Rajiv Gauba has suggested an “institutional mechanism” to manage such obstacles, and provide “hand-holding” for firms. Increasingly, therefore, this sounds like old-style industrial policy in which cash is provided to uncompetitive units in order to ramp up production for the domestic market, embedding institutional links between industrialists and the bureaucracy that eventually become very hard to disentangle. The government’s motivation is easy to understand. The seven-year-old call to “Make in India” has not been answered. Domestic reforms have not gone deep enough to enthuse investors. There is a shortage of skilled labour and the rupee is overvalued. The temptation therefore to spend taxpayers’ money to bridge the viability gap is inescapable. Nevertheless, the government seems to have ventured down this road without a clear map in mind, or even an understanding of the costs of import substitution.
What is the aim of the PLI scheme? If it is generating factory jobs, it should be concentrated in labour-intensive sectors. If it is strategic independence from the vast production base of China, then it should focus on diversifying specific China-focused supply chains alongside a China-focused trade policy. If it is simple import substitution, then it is unclear why PLI is a better option than tariff walls — though both are bad ideas, if so. And if it is to create a globally competitive industry, then the PLI mechanism is unlikely to overcome existing barriers to export without an unaffordable and growing cost to taxpayers. There are very limited circumstances in which an economic case for such policy incentives can be made — for example, in sectors that can be shown to be poised for take-off, where a foreign and domestic market exists, and where the only major constraint is, say, the cost of purchasing intellectual property or other lumpy start-up costs. Under these circumstances, creating a scheme that front-loads some returns for manufacturers might work to induce viable investments. Perhaps some of the PLI sectors — lithium-ion batteries, for example — meet these criteria. It is meaningless, however, to spread the scheme across multiple sectors, and to try to do it all at once.