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Make in India – Backside Loop Hole

Context

  • The scope and viability of the Production Linked Incentive scheme are discussed in this article (PLI).
  • The government has set aside Rs 1.97 lakh crore for PLI schemes in various sectors in Budget 2022-23, with an additional allocation of Rs 19,500 crore for PLI for solar PV modules.

Relevance

GS Paper 2: Growth & Development, Government Policies & Interventions

Mains Question

Make in India, which aimed to establish India as a global manufacturing hub, has failed. Analyse. (150 Words)


Production-Linked Incentive Plan (PLI)

  • Goal: Its goal is to establish a sustainable manufacturing base in India.
  • Reasons for launching the PLI scheme: It is based on the premise that India produces insufficiently. According to the GoI, for example, the electronics sector has a competitive disadvantage of around 8. 5-11% as a result of the following factors:
    • Inadequate infrastructure in India and high financing costs
    • Inadequate supply of high-quality power
    • Industry’s limited design capabilities and neglect of R&D
    • Skill deficiencies among Indian workers.
  • So far, the government has announced PLI schemes for 14 industries, including automobiles and auto components, electronics and IT hardware, telecommunications, solar modules, pharmaceuticals, metals and mining, textiles and clothing, white goods, drones, and advanced chemical cell batteries.

PLI scheme incentive measurement

• The incentives range from as little as 1% for electronics and technology products to as much as 20% for the production of critical key starting drugs and certain drug intermediaries.

• In some industries, such as advanced chemistry cell batteries, textile products, and the drone industry, the incentive will be calculated over a five-year period based on sales, performance, and local value addition.

Understanding PLI through the cellphone industry

  • Raised customs duties: In April 2018, customs duties on mobile imports were raised to 20%.
    • Impact: This immediately increased domestic mobile phone prices, allowing manufacturers to charge Indian customers more.
  • PLIs were then introduced, which offered manufacturers a government payment of 6% in the first year for every cellphone produced in India, decreasing to 4% in the fifth year if they met incremental investment and sales targets.
  • Caveat: Even if a manufacturer imports all of the parts from outside the country and simply assembles them in India, he still receives the 6% subsidy on the invoice.
  • State waivers: States also provide state-GST waivers (about 9% of the price), as well as power, land, and capital expenditure subsidies. As a result, the combination of protection and subsidies makes it very profitable to manufacture and even export in India. As a result, manufacturers are competing to be chosen for the scheme.
  • Who pays: Because of tariffs, the Indian customer pays a higher price. Subsidies are paid for by the Indian taxpayer, not only to Indian firms chosen for PLI, but also to international manufacturers such as Foxconn and Wistron.

Telephone, cellular phone, and related equipment EXIM data

  • Prior to the implementation of PLI: Prior to the implementation of PLI and Covid in 2019, exports were $1. 6 billion, with imports totaling $4 billion. 4 billion, resulting in a net deficit of $2 billion. 8 trillion
  • After the implementation of the PLI, exports were $2 in 2021. 7 billion, with imports of $5 billion. 2 billion, resulting in a net deficit of $2 billion. 4 billion dollars
  • Trend: Exports have increased significantly, but they were already trending upward prior to the PLI. Imports, on the other hand, were declining and are now increasing, which is consistent with PLI encouraging manufacturers to import parts as long as the final assembly is done in India.

The primary concern of the PLI scheme

  • Uncertainty about continuation: It is unclear whether manufacturers will continue to produce after the scheme expires.
  • Better climates: When the PLI expires, producers may shift production to better climates, such as Vietnam, and achieve scale economies without incurring disadvantages.
    • Given the low investment required to qualify for PLI (approximately $125 million over four years), they will have little ties to India.
  • Intensify demand: Manufacturers may continue to produce, but they will need tariff and subsidy protection to do so. Firms are already lobbying for the extension of PLI to compensate for the pandemic period. They can also threaten to close down and fire employees if the scheme fails. In order to avoid civil unrest, the government may agree to their demand.
  • Risks associated with PLI-induced domestic production: If PLI-induced domestic production does not become globally cost-competitive, it will reduce exports in other sectors.
    • High-cost domestically produced PLI-favored semiconductors, for example, will reduce the competitiveness of two-wheeler exports that rely on chips.

Progressive measures

  • Monitoring: The NITI Aayog has recently begun work on developing a set of objective criteria to track the value added by companies that receive financial incentives through Production-Linked Incentive (PLI) schemes.
    • A dashboard will also be created to identify roadblocks at the state level.
  • Agency: The NITI Aayog intends to enlist the assistance of an external agency – the state-owned Industrial Finance Corporation of India (IFCI) Ltd or SIDBI – in designing and preparing a centralised database to track progress in PLI schemes across sectors.
  • Importance: This database will track value addition, actual exports versus committed exports, and job creation.
  • Background: Currently, different ministries track the value addition of their respective PLI schemes, and there is no way to compare them. There was no standardised set of parameters for determining the value added by companies that have received or are likely to receive PLI scheme incentives.

The way forward

Longer-term tasks such as increasing human capital investment, developing a simple but fair land acquisition process, ending the constant rejigging of tariffs and taxes that make it difficult for producers to invest, and strengthening infrastructure require new substitutes.

 


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