Incentives linked to production – like the priest’s egg, good in part
In its excessive and obsessive desire to promote Make in India at all costs, the PLI program ignored certain fundamental economic concerns and principles.
Launched in March 2020 targeting the electronics sector, the Centre’s Production Linked Incentives (PLI) program is the Narendra Modi government’s attempt to boost high-cost manufacturing. The objective is for the sector to contribute 25% of GDP by 2025, compared to 16% currently. Naturally, this would also provide job opportunities.
The fact that there are as many schemes as there are key factors identified by the government in conjunction with Niti Aayog speaks to its unique anti-size character. The government realized that each industry has its own problems and opportunities and therefore avoided the blanket approach.
The other virtue of the PLI is that it is only awarded and disbursed when the results are shown in terms of additional production, which is why it is also called piece-rate incentive. It is also WTO compliant as it avoids trade-distorting export subsidies and is rather secular – incentives are available regardless of whether you are exporting or serving the domestic market.
The reason the inventory at this point in the program is done here is to see why it hasn’t pushed production significantly except in the mobile phone sector where all the big boys like Samsung and Apple are excited and not not only eagerly adopt the program, but also start exporting.
Made in India
But as Raghuram Rajan points out, in his excessive and obsessive desire to promote manufacturing in India at all costs, he ignored some of the fundamental economic concerns and principles. For example, PLI has completely overtaken the MSME sector – accounting for 36% of domestic production and 40% of exports – in its effort to woo the big guys in each sector. This goes against his avowed Swadeshi board which swears by small domestic producers.
He also did all he could to promote domestic manufacturing by raising import duties, lest domestic manufacturing be considered unworthy and imports be preferred. Rajan cites the example of the mobile phone industry.
Import duty on mobile phones was raised to 20% in April 2018 as a precursor to PLI bait manufacturing in India. The result – iPhone 13 pro max available in Chicago for Rs 92,500 while the same model in India is priced at Rs 1.29 lac, a markup of almost 40% thanks to the domestic industry protection swadeshi principle that denies Indian buyers the benefits of dumping consisting of lower prices for imported products. In other words, Apple like Sony of the 1970s would have been happy to sell cheap iPhones in India vis-à-vis the United States had it not been for PLI.
Other problems with PLI
Not only that, value addition is completely ignored by PLI to such an extent that a cell manufacturer is pampered with a PLI subsidy even if he imports all the parts and only assembles them in India. This effectively turns the 6% PLI subsidy into a significant subsidy of 25% to 30% value added given that the incentive is on the price charged while the value added is only a tiny fraction of it.
He also doesn’t care about cost reduction as long as production is increased. This is because the manufacturer has no incentive to care about cost and price because the incentive is based on quantity.
PLI is also criticized for its borderline fanciful selectivity – the textile industry tops the list of 13 sectors notified to date but strangely the leather industry is left behind. The simplest answer is that the government has a limited budget allocation for each scheme, so much so that when the actual eligible incentive exceeds the allocation, there is incentive rationing among claimants.
Automotive giants are unable to meet their incremental revenue commitment given the shortage of chips so critical in modern cars. But the PLI regime is a swift, not tolerating any exceptions, even for genuine commercial reasons. The dislocation of the supply chain with the ongoing war in Ukraine does not engender sympathy for the lack of production either.
Globally, manufacturing is being incentivized in various ways – such as the creation of special economic zones; tailor-made logistics and specific incentives; tax and credit based systems and research and development based approaches. India’s quantity-based ILP system is akin to the “piece rate” method. Apart from being simple, it is considered to be the best method to ensure higher productivity. Special R&D incentives, while seemingly progressive, give charlatans a head start, as the Indian income tax alliance shows.
PLI showed results in the mobile phone segment of the electronics sector. Apple suppliers led by Foxconn have pledged to produce at least Rs 25,000 crore of mobile devices in FY23 from April 1.
This is a triple jump in the commitment of minimal incremental production in FY22. But as previously stated, this comes at a high price for domestic customers with high import duties discouraging actually imports. In short, the PLI is the old wart protection of the domestic industry model and all without worrying about the domestic consumer who otherwise might have gorged on cheap imports.