Production Linked Incentive Scheme and its Implications – All India Radio (AIR) IAS UPSC

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  • June 3, 2021
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TOPIC: General Studies 3

  • Indian Economy

In News: Prime Minister Narendra Modi said production linked incentive (PLI) scheme, which is aimed at boosting domestic manufacturing and exports, is expected to increase the country’s production by USD 520 billion in the next five years.

  • In this year’s Budget, about Rs 2 lakh crore was earmarked for the PLI scheme for the next five years and there is an expectation that the scheme would result in increasing the production by about USD 520 billion in the next five years
  • There is also an expectation that the current workforce in the sectors, which will avail the benefits of the PLI scheme, will be doubled and job creation will also increase.
  • The government is working to reduce compliance burden, further improve ease of doing business, reducing the compliance burden, creating multi-modal infrastructure to reduce logistics costs, and constructing district-level export hubs..
  • An average of 5 per cent of production is given as incentive. This means that PLI schemes will lead to production worth USD 520 billion in India in the next five years.
  • Self-regulation, self-attesting, self-certification is being emphasized.
  • Difference between the earlier schemes and those of the current government: the earlier industrial incentives used to be open ended input-based subsidies, now they have been made targeted and performance based through a competitive process.

PLI Scheme 

The scheme aims to make India self-reliant in manufacturing goods for local and export markets, positioning it as a global manufacturing hub. It also aims to make domestic manufacturing competitive and efficient, build capacity, and benefit from economies of scale, enhance exports, attract investment and create jobs. The success story of special economic zones (SEZs) only adds credence to the impact that this scheme can also have on the economy. The scheme is on the lines of ‘Made in China 2025’ which aims at enhancing competitive strength of selected sectors.

Why is the production linked scheme needed?

According to experts, the idea of PLI is important as the government cannot continue making investments in these capital intensive sectors as they need longer times for start giving the returns. Instead, what it can do is to invite global companies with adequate capital to set up capacities in India. The kind of ramping up of manufacturing that we need requires across the board initiatives, but the government can’t spread itself too thin. Electronics and pharmaceuticals themselves are large sectors, so, at this point, if the government can focus on labour intensive sectors like garments and leather, it would be really helpful.

How will it incentivize manufacturing ops?

The production-linked incentive scheme gives eligible manufacturing companies a 4-6% incentive on incremental sales over the base year of 2019-20 for a five-year period. It is a kind of subsidy being provided by direct payment from the budget for domestically manufactured goods. The incentive amount varies across sectors and savings generated from PLI of one sector can be utilized to fund other sectors, maximizing returns. The PLI scheme will incentivize large domestic and global players to boost production, build a competitive ecosystem and lead to more inclusive growth.

A. For Pharmaceuticals: The Scheme will 

  • Benefit domestic manufacturers
  • Is expected to contribute to the availability of wider range of affordable medicines for consumers
  • Promote the production of high value products in the country and increase the value addition in exports.  Total incremental sales of Rs.2,94,000 crore and total incremental exports of Rs.1,96,000 crore are estimated during six years from 2022-23 to 2027-28.
  • The scheme is expected to generate employment for both skilled and un-skilled personnel, estimated at 20,000 direct and 80,000 indirect jobs as a result of growth in the sector.
  • Promote innovation for development of complex and high-tech products including products of emerging therapies and in-vitro Diagnostic Devices as also self-reliance in important drugs.  
  • Improve accessibility and affordability of medical products including orphan drugs to the Indian population.  The Scheme is also expected to bring in investment of Rs.15,000 crore in the pharmaceutical sector.

The scheme will be part of the umbrella scheme for the Development of Pharmaceutical Industry. The objective of the scheme is to enhance India’s manufacturing capabilities by increasing investment and production in the sector and contributing to product diversification to high value goods in the pharmaceutical sector. One of the further objectives of the scheme is to create global champions out of India who have the potential to grow in size and scale using cutting edge technology and thereby penetrate the global value chains.

B. For IT Hardware: The scheme proposes production linked incentive to boost domestic manufacturing and attract large investments in the value chain of IT Hardware. The Target Segments under the proposed Scheme include Laptops, Tablets, All-in-One PCs and Servers.

  • The Scheme shall, extend an incentive of 4% to 2% / 1% on net incremental sales (over base year i.e. 2019-20) of goods manufactured in India and covered under the target segment, to eligible companies, for a period of four (4) years.
  • The scheme will enhance the development of electronics ecosystem in the country. India will be well positioned as a global hub for Electronics System Design and Manufacturing (ESDM) on account of integration with global value chains, thereby becoming a destination for IT Hardware exports.
  • The scheme has an employment generation potential of over 1,80,000 (direct and indirect) over 4 years.
  • The Scheme will provide impetus to Domestic Value Addition for IT Hardware which is expected to rise to 20% – 25% by 2025

C. For Telecom Sector

Pursuant to the extraordinary incentive of PLI being provided by Government of India in various sectors, the Cabinet approved the Production Linked Incentive (PLI) Scheme for Telecom and Networking Products. This approval comes in wake of very encouraging success of PLI related to Mobile and component manufacturing, which was announced in April 2020 during the height of Covid pandemic.

Cabinet decision addresses another component of Atmanirbhar Bharat to make India a global hub of manufacturing telecom equipment including core transmission equipment, 4G/5G Next Generation Radio Access Network and Wireless Equipment, Access & Customer Premises Equipment (CPE), Internet of Things (IoT) Access Devices, Other Wireless Equipment and Enterprise equipment like Switches, Routers etc.

  • The core component of this scheme is to offset the huge import of telecom equipment worth more than Rs. 50 thousand crores and reinforce it with “Made in India” products both for domestic markets and exports.
  • Financial Year 2019-20 shall be treated as the Base Year for computation of cumulative incremental sales of manufactured goods net of taxes.
  • The Scheme will be operational from 1st April 2021.
  • This scheme also addresses local manufacturing in MSME category because Government desires MSMEs to play an important role in the telecom sector and come out as national champions. 
  • This scheme will lead to incremental production of around ₹2.4 Lakh Crores with exports of around ₹2 Lakh Crores over 5 years. It is expected that scheme will bring investment of more than ₹3,000 crore and generate huge direct and indirect employment and taxes both.

D. For Large Scale Electronics Manufacturing

  • The scheme proposes a financial incentive to boost domestic manufacturing and attract large investments in the electronics value chain including electronic components and semiconductor packaging.
  • Under the scheme, electronics manufacturing companies will get an incentive of 4 to 6% on incremental sales (over base year) of goods manufactured in India for a period of next 5 years.
  • The scheme shall only be applicable for target segments – mobile phones and specified electronic components.
  • With the help of the scheme, domestic value addition for mobile phones is expected to rise to 35-40% by 2025 from 20-25%. 
  • It shall also generate 8 lakh jobs more, both direct and indirect.

Connecting the Dots:

  1. Key components of production linked incentive (PLI) scheme
  2. Discuss the need for production linked incentive (PLI) scheme in India.

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