*PLI scheme with a return for the government | Business Standard Column

lipped from: https://www.business-standard.com/article/opinion/pli-scheme-with-a-return-for-the-government-122041801285_1.html

Despite the massive opportunity cost of the PLI scheme, there is considerable enthusiasm amongst the proponents of the scheme

Gurbachan Singh

The government’s ambitious production-linked incentive (PLI) scheme is to overcome the disadvantage of high costs in the country and to encourage production on a very large scale in some selected industries. The scheme aims to reduce costs per unit of output, and help not just the economy but the country more generally. However, there are concerns.

As we know, the corporate sector has been given several benefits already. The corporate tax rates have been cut substantially, the real interest costs have been kept at very low levels, the customs duties have been raised significantly, and the price of dollar has been kept high through the excessive build-up of foreign exchange reserves over the years; this helps domestic businesses. All this is reflected in the high level of the BSE Sensex as well. So it is not clear if the government should provide yet another financial incentive like the PLI.

The hesitation on the PLI scheme is even more when we see that the estimates of public spending on the scheme are anywhere between Rs 1.93 trillion and Rs 3.47 trillion. This is big money — more so, when the government is fiscally constrained and is having to resort to a huge tax on oil, which is regressive and which contributes to cost-push inflation more generally.

Despite the massive opportunity cost of the PLI scheme, there is considerable enthusiasm amongst the proponents of the scheme. However, there are doubts in the minds of others — more so, when there can be alternative policies to achieve the desired objectives without adversely impacting the budget of the government. I will not get into the details of the debate on whether or not we should have the PLI scheme at all. The point here is different.

Let us suppose that the PLI scheme must be in place. The question is, what should be its design? Observe that though the country can benefit in a general way, the main benefit is for the companies that receive the incentive; it is not for the Government of India (GoI), the taxpayers, and the public more generally. It is proposed here that the scheme is modified to include a possible return for the government that is contingent on the performance of the company that receives the incentive.

There can be several indicators of performance of a recipient company. One indicator can be that the time path of inflation-adjusted pay-outs (dividends plus share buybacks) by the company goes up above a pre-specified path. Another indicator can be that the real salaries and bonuses of the employees of the recipient company go above a given path. Yet another indicator can be that the real market value of the recipient company in the equity market, averaged over, say, three years, goes up above a predetermined path.

The above proposed amendment to the PLI scheme does not really discourage large production or high profitability, if the requirement is to pay only a small fraction, say, a fifth of the excess money made by the recipient company.

The above suggested amendment to the PLI scheme is the ideal way to provide a return to the government in exchange for the financial incentive provided now. However, if the above amendment seems complicated or it is believed to be prone to serious moral hazard on the part of the management of the recipient company, then we can have a simpler structure. The government could be just given some shares of the recipient company “for free” at the time of providing the financial incentive.

How do the two different amendments to the PLI scheme that are suggested here differ from each other? In the second case, all, and not some, of the recipient companies will need to provide a return to the government, regardless of how successful they are. Furthermore, the recipient companies need to provide a return to the government in all, and not some, of the years in which they have a pay-out for the shareholders, regardless of whether the pay-out is big or small. All this is not the case under the amendment discussed earlier.

Of course, there is a need to do some more work on the law, economics, public administration, and politics involved to make a seamless and meaningful amendment to the PLI scheme. This column has focused on the basic principle involved here. It will be useful as a precedent for future incentive schemes as well.

To conclude, it is not clear if the GoI should run the very costly PLI scheme. But if a financial incentive is provided now, then there should be some possible return in future for the government.The writer is visiting faculty at the Indian Statistical Institute, Delhi Centre

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