What are Production Linked Incentive Schemes and How Will They Build Up India’s Manufacturing Capacity?
Production linked incentive (PLI) schemes were first introduced in India in March 2020, targeting three sectors. The PLI concept has since expanded with schemes rolled out for multiple sectors to make India self-sufficient in manufacturing products and to cater to both domestic and international markets.
In other words, the PLI schemes aim to position India as a global manufacturing hub by improving the local supply chain, developing key downstream operations, and incentivizing investments in high-tech production.
As of writing this article, the PLI schemes cover 13 sectors like pharmaceuticals, mobile phones, specialty steel, auto components, technical textiles, etc., with a total budgeted outlay of INR 1970 billion (US$26.48 billion). Each PLI scheme is applicable for a four to six-year duration period, depending on the sector.
Through their implementation, it is hoped that economies of scale are created so that domestic manufacturing becomes competitive. The resultant benefits include job creation, export capabilities, and lessening the import dependency – particularly in critical sectors and high-tech goods.
It is envisaged that India’s total industrial production will increase by over US$520 billion during the period covering PLI policy implementation. Additionally, the government is also working on reducing compliance burden, improving the ease of doing business, creating multi-modal infrastructure to reduce logistics costs, and constructing district-level export hubs (see PDF from the Ministry of Commerce).
How do the production linked incentive schemes work?
The PLI framework enables India to take definitive steps, in the near term, to expand the manufacturing potential of the economy. The pillars of the policy are:
- Creation of large-scale manufacturing capacity: Since the incentives are directly proportional to production capacity/ incremental turnover, it is expected that investors will be compelled to create large-scale manufacturing facilities. Furthermore, it is also expected to bring improvements in industrial infrastructure, benefiting the overall supply chain ecosystem.
- Import substitution and increase in exports: PLI schemes intend to plug the gap between the highly skewed Indian import- export basket, which is mainly characterized by heavy imports of raw materials and finished goods. The PLI schemes are intended to enable domestic manufacture of goods, thereby causing a reduction in reliance on imports in the short term and expanding quantum of exports from India over long term.
- Employment generation: As large-scale manufacturing requires large labor force, it is expected that the PLI schemes will utilize India’s abundant human capital and enable upskilling and technical education.
Implementation of the schemes
The PLI schemes provide eligible manufacturing companies incentives ranging from four to six percent on incremental sales over the base year of 2019-20 for a four to six-year period. It is like a subsidy being provided by direct payment – as budgeted – for domestically manufactured goods by the chosen beneficiaries.
The incentive amount offered varies across sectors and the savings generated from PLI of one sector can be appropriated towards other sectors in order to maximize returns. The PLI schemes are intended to incentivize large domestic and global players to participated in production and lead to more inclusive growth across the country.
Which sectors are covered under India’s PLI schemes?
There are 13 sector beneficiaries of the PLI schemes. They are as follows:
- Automobiles and auto components: India’s federal government has approved the PLI scheme for automobile and auto components with a budgetary outlay of INR 259.38 billion (US$3.50 billion) to boost domestic manufacturing capacity, including the production of electric and hydrogen fuel cell vehicles. The main implementing agencies for the scheme is Ministry of Heavy Industries and Public Enterprises.
- Drones and drone components: Under the PLI Scheme for drones and drone components, the government has liberalized the minimum value addition criteria to 40 percent of net sales for drones and drone components. The budget of the scheme is INR 1.2 billion (US$16.13 million). The main implementing agencies for the scheme is Ministry of Civil Aviation.
- Advanced chemical cell (ACC) batteries: An outlay of INR 181 billion (US$2.43 billion) has been earmarked by the government towards the scheme, which is intended to establish local manufacturing capacity of 50 Giga Watt Hour (GWh) of ACC and five GWh of Niche ACC capacity. The main implementing agencies for the scheme are the Department of Heavy Industries and NITI Aayog. This scheme is also in sync with India’s objective of accelerating EV adoption over the coming decade, while also reducing the dependence on imports. The scheme is mainly targeted at large players.
- Electronics systems and technology: The implementing agency for this scheme is the Ministry of Electronics and Information Technology. It includes products like mobile phones, specified electronic components, laptops, tablets, all-in-one PCs, servers, etc.
- Electronics manufacturing: The budget outlay for this scheme is INR 400 billion (US$5.38 billion).
- IT hardware: The budget outlay for this scheme is INR 73.25 billion (US$984.68 million).
- Food processing: Approved with an outlay of INR 109 billion (US$1.47 billion), the main implementing agency of this scheme is the Ministry of Food Processing. The ensuing benefits from the PLI scheme in this sector are expected to trickle down further to the farmers and help harness the massive employment generation potential in the sector. Products like ready to eat / ready to cook, marine products, fruits and vegetables, honey, desi ghee, mozzarella cheese, organic eggs and poultry meat etc. will be included.
- Medical devices: The Indian Government has identified medical devices as a priority sector for the flagship ‘Make in India’ program and is committed to strengthening the manufacturing ecosystem. The PLI phase one of this scheme has been completed and phase two has been announced. The eligible medical device segments under this scheme include
- Cancer care / radiotherapy: Brachytherapy systems, rotational cobalt machine, radiotherapy simulation systems, linear accelerator (linac), proton therapy system, etc.
- Radiology, imaging and nuclear imaging devices: CT Scan, MRI, ultrasonography, X-ray equipment, mammography, C-arm, Cath-Lab, positron emission tomography (PET) Systems, single-photon emission tomography (SPECT), cyclotrons, etc.
- Anesthetics, cardio-respiratory and renal care: Needles-anesthesia, syringes-anesthesia, anesthesia workstation, anesthesia unit gas scavengers, anesthesia kits, masks —anesthesia, anesthesia unit vaporizers, anesthesia unit ventilators, automated external defibrillators (AEDs), dialyzer, dialysis machine, peritoneal dialysis kits, etc.
- All implants: Cochlear implants, hip implants, knee implants, spinal and neuro-surgical implants, urogynecologic surgical mesh implants, hernia surgical mesh implants, cerebral spinal fluid (CSF) shunt systems, implanted pacemakers, insulin pump, implanted neuro-stimulated device like deep brain stimulator, intraocular lenses, heart valves, stents etc.
- Specialty steel: Approved with an outlay of INR 63.22 billion (US$849.85 million), the main implementing agency of this scheme will be Ministry of Steel. This scheme the central sector scheme will be implemented for a five-year period, from 2023-24 to 2027-28. The five categories of specialty steel that have been selected in the PLI scheme are coated/plated steel products, high strength/wear resistant steel, specialty rails, alloy steel products and steel wires and electrical steel.
- Pharmaceuticals: The Indian pharmaceuticals market is supported by the following PLI schemes to boost domestic manufacturing capacity, including high-value products across the global supply chain. The implementing agency for these schemes is the Department of Pharmaceuticals.
- PLI scheme for Key Starting Materials (KSMs)/Drug Intermediates (DIs) and Active Pharmaceutical Ingredients (APIs) (PLI 1.0)
- PLI scheme for Pharmaceuticals d (PLI 2.0)
- White goods: Total incentives applicable under the PLI scheme for white goods (Air Conditioners and LED Lights) will cost the government INR 62.38 billion (US$831.27 million). The target segments under air conditioners are:
- Air conditioners (components – high value intermediates or low value intermediates or sub-assemblies or a combination thereof)
- High value intermediates (copper tubes, aluminum foil, and compressors)
- Low value intermediates (PCB assembly for controllers, BLDC motors, service valves, and cross flow fans for AC and other component.
The target segments under LED include:
- LED lighting products (core components like LED chip packaging, registers, ICs, fuses, and large-scale investments in other components.
- Components of LED lighting products (like LED chips, LED drivers, LED engines, mechanicals, packaging, modules, wire wound inductors, and other components.
- Solar photovoltaic (PV) modules: Total incentives for eligible investors in the production of solar modules will cost the government INR 45 billion (approx. US$599.99 million) under the PLI scheme.
- Telecom and networking products: Approved with an outlay of INR 121.95 billion (US$1.64 billion), the main implementing agency of this scheme will be Department of Telecommunications. Recognizing the need for additional support to MSME units, it allows them additional incentives in the initial years. This scheme would aid the ongoing focus towards digital transformation. The list of specifies target products include core transmission equipment, 4g/5g, next generation radio access network and wireless equipment, access & customer premises equipment (CPE), internet of things (IoT) access devices and other wireless equipment, enterprise equipment: switches and other products as maybe decided by empowered group of secretaries.
- Textiles and apparels: Approved with an outlay of INR 106.83 billion (US$1.44 billion), the main implementing agency of this scheme will be Ministry of Textiles. This scheme intends to shift the textile production from natural fibers to man-made fibers and technical textiles, aligning with global consumption patterns. The product segments under this sector will include man-made fiber segments as well as technical textiles.
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