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The Push to Make Indian Manufacturing Globally Competitive

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The Push to Make Indian Manufacturing Globally Competitive

The government’s Production Linked Incentive (PLI) scheme seeks to buoy India’s manufacturing sector, but don’t expect it to be a gamechanger.

The Push to Make Indian Manufacturing Globally Competitive
Credit: Depositphotos

India showcased its diplomatic prowess as it wrapped up a successful G-20 summit in New Delhi last week. The G-20 presidency has provided the world’s largest democracy an opportunity to be a critical part of not only the world economic order but also global governance going forward. This comes at an opportune time when the Indian economy has been touted as the fastest growing major economy in the world amid decelerating global growth. 

In the past two decades, the Indian economy has exhibited a steady average annual growth rate of 6 percent year-on-year. Despite this impressive growth, the Indian manufacturing sector still accounts for only 17 percent of India’s GDP and a mere 2.8 percent of global manufacturing, which pales in comparison to advanced economies like the United States (18 percent) and Asian peers like China (28 percent).

The Indian government is well aware of this disparity and has intensified its efforts to stimulate manufacturing growth by implementing various reforms. These reforms focus on enhancing the ease of doing business, improving logistics efficiency, promoting sustainable and environmentally friendly practices, and providing direct incentives for investment through initiatives like the Production Linked Incentive (PLI) scheme. These reforms also align with India’s “China plus one” strategy, which seeks to attract foreign businesses seeking to diversify their supply chains. 

The Production Linked Incentive Scheme is a flagship scheme of the government of India as part of Prime Minister Narendra Modi’s Atmanirbhar Bharat Abhiyaan, or Self-reliant India Campaign. The PLI has the overall objective of making the Indian manufacturing industry competitive. 

When first rolled out in March 2020, the PLI targeted three industries: mobile manufacturing and electric components, pharmaceuticals (critical key starting materials and active pharmaceutical ingredients), and medical device manufacturing. Today, the scheme covers 14 sectors in total with a PLI incentive outlay of over 1.9 trillion Indian rupees ($23 billion). The objective of this scheme is to boost local value addition and reduce dependence on imports wherever Indian industry has the capability to substitute imports. 

As per the government of India’s Economic Survey, the PLI scheme is expected to attract an investment of 3 trillion rupees over the next five years and has the potential to generate 6 million jobs. 

The success of the PLI scheme for large-scale electronics manufacturing (LSEM) in the mobile manufacturing industry has enthused other sectors and industries as well. As per India’s Ministry of Electronics and Information Technology (MEITY), 97 percent of mobile smartphones sold in India are now being made in India, compared to 92 percent of smartphones being imported in 2014. Smartphone exports have also grown by 139 percent over the last three years and the production of mobile phones has risen from about 60 million in fiscal year 2015 to around 310 million in fiscal year 2022. The numbers speak for themselves.

Apart from manufacturing capability and potential, for the purposes of the PLI , the government has focused on sectors where import dependency was very high and the domestic industry could, with little handholding from the government, substitute those imports. Therefore, sectors covered by the PLI scheme constitute around 40 percent of India’s total imports. 

With an eye toward the future new age, green and sustainable manufacturing sectors are being given priority. These are areas where future market potential is very high: advanced carbon composite (ACC) batteries, solar modules, electric vehicles, etc.  Currently the volume of imports may be limited in such sectors but as the market for such technology grows the domestic market would be flooded with imports. Therefore there is a need to develop domestic capability in such sectors now. 

As per government, data, almost 65 percent of the committed investment under the PLI is expected in five sectors – electronics manufacturing (22 percent), solar PV modules (12.8 percent), automobiles and auto components (13.8 percent), ACC batteries (9.6 percent) and pharma drugs (8 percent). The disbursements, which are generally in the range of 4 to 6 percent (higher in several cases), will be provided on an annual basis only when the company meets the committed revenue target of that year. 

By promoting investments in core areas and new age technology, the government is making efforts to create economies of scale, which will eventually reduce production costs for the industry in the medium to long run. To encourage participation from small-scale industry as well,  some of the PLI schemes (for example, the white goods scheme) are designed in a way that they set different revenue and investment thresholds for large, medium and small investments categories.

On an aggregate level , the government will disburse approximately 70 percent of the investment made by Indian industry in the form of PLI incentives over the tenure of the scheme. Across all the sectors, the average incentive paid as percentage of sales is about 5.5 percent. 

In terms of the status of actual investment, 17 percent of the total committed investment has been realized till now. Ten percent of the expected revenue has been generated to date. In terms of employment, almost 13 percent of the expected jobs have been generated so far. The above is based on data provided by the government during the Budget Fiscal Year 2024 and PLI press releases.

If these figures seem low, that is because of the way the scheme is structured. For most projects, production will peak only in fiscal year 2025. For more than 80 percent of the projected investments, the peak of capital expenditure deployment is expected in fiscal year 2024 and beyond, so the real impact in terms of investment and production will be known only after that. 

The PLI scheme is expected to provide a foundation and initial fillip to the Indian manufacturing sector; however, it is not a cure for India’s manufacturing woes, some of which are deep rooted (high logistics costs, regulatory burdens, etc.) and will take time to ease. The investments made under the PLI scheme are subject to time-bound outputs, and hence timely approvals and clearances from different ministries as well as respective state governments are extremely critical. 

Despite various attempts by the government to set up a single-window clearance system, coordination between state and central government agencies is seen as an impediment to timely approval. Delays will lead to companies missing their targets and incentives and hence capital expenditure deployments.

In the current global scenario, the Indian government could consider providing some flexibility to certain sectors on a case-by-case basis in case of genuine production delays – either due to delays in approvals or global macroeconomic as well as geopolitical factors.

Overall flexibility combined with due diligence, lower administrative inefficiencies and compliance burdens, and handholding in case of business contingencies or external factors, will help maximize the program’s efficacy. But don’t expect the PLI to be a gamechanger; it is rather an initial fillip for driving investment in the short term.