India’s Production Linked Scheme Aims to Transform Global Supply Chains
India's Production-Linked Incentive (PLI) scheme has emerged as a vital tool in bolstering the nation's manufacturing sector. Introduced in 2020 and expanded to cover 14 sectors, the scheme has supported domestic production, while also attracting foreign investment. While disbursement delays have been noted, the scheme's impact on sectors like mobile phones has been remarkable, driving growth and exports, and even prompting the idea that India could transform the global supply chain. Challenges remain, with certain sectors not fully benefiting from the scheme's short window and the scheme highlighting a substantial skill gap.
Current Landscape of the PLI Scheme
In a bid to bolster its manufacturing sector and promote domestic production, the Indian government introduced the Production-Linked Incentive (PLI) scheme in 2020. Designed as a catalyst for economic growth and self-reliance, the scheme offers incentives to various industries, aiming to enhance exports, reduce imports and generate employment opportunities. The PLI scheme, initially rolled out for three sectors, has rapidly expanded to encompass 14 manufacturing domains, including mobiles, medical devices, automobiles, pharmaceuticals and more. With a commitment of INR 1.9tn ($23.8bn), the scheme has garnered attention as a crucial driver of India's manufacturing resurgence. As of March 2023, the scheme has received 733 applications across all sectors, anticipating investments worth INR 3.65tn ($44.2bn). While the actual investments realized stand at $7.6bn, the consequential production and sales increment is impressive, amounting to over $81.8bn.
Under the scheme, incentive claims exceeding $400mn have been made for eight sectors, with disbursements exceeding $34mn. Notably, the electronics manufacturing sector witnessed the highest disbursement at $20mn, highlighting its positive reception among stakeholders. However, some concerns have been raised regarding the pace of disbursement.
Success Story: Mobile Phone Sector
One of the scheme's notable success stories lies in the mobile phone sector. The India Cellular and Electronics Association (ICEA) has reported a remarkable growth trajectory for mobile phone exports, projected to surpass $14.5bn in the current financial year, a significant increase from the previous year's $10.9bn. Driven by the PLI scheme, this sector has witnessed a staggering 128% growth in exports during the initial months of the year. Furthermore, a recent report by Bank of America suggests that the PLI scheme might encourage Apple to shift nearly 18% of its global iPhone production to India by 2025.
The scheme's impact on the mobile phone sector is evident in the improved export mix of locally produced devices. The export contribution of local production has risen from 16% to 25%, positioning India as a credible global supply chain alternative for mobile phones and electronics.
Challenges Persist
Beyond bolstering exports, the PLI scheme's influence on India's trade deficit, macroeconomic outlook, and foreign exchange stability cannot be overstated. While the PLI scheme has yielded positive outcomes, some sectors are yet to experience its full potential. Sectors such as solar PV modules, advanced chemistry cell batteries, textile products and specialty steel have not witnessed the desired level of growth. One contributing factor is the relatively short window for the scheme, making it challenging for investors to make substantial commitments within the stipulated time frame. Recognizing this limitation, the government is reportedly contemplating reopening the PLI window for select sectors. Additionally, in to support domestic growth, some of these sector rely on heavy imports from China; India is reportedly aiming to reduce its trade deficit with China and therefore this is counterproductive.
Additionally, the scheme's mixed results have prompted introspection. An emerging concern is the availability of labour. While, the government is deploying the scheme to generate employment in the country, it is worth noting that there exists a certain skill gap. India is banking on its large demographic dividend to shore up investment and become the next manufacturing hub for the world. However, the labour force’s efficiency and skill potential are yet to be fully tests and there is a concern that this particular resource may before perform below potential.
Expanding the Horizon
The government is exploring avenues to expand the PLI scheme to additional sectors. Proposals to extend fiscal benefits to industries such as toys, leather, footwear, and components for new-age bicycles are in advanced stages of consideration. The intention is to leverage the PLI scheme's success and replicate it in labour-intensive sectors, thus magnifying its impact on employment generation. While the scheme has the ability to incentivize production, elevate exports and generate employment, the full impact of the scheme across sector is yet to be revealed. Notably, the mobile phone sector stands out as a beacon of success, demonstrating the scheme's potential to transform global supply chains. Nevertheless, challenges remain, including the need to fine-tune scheme specifics and extend its benefits to more sectors.