Tracing the journey of Production Linked Incentive scheme: Has it made India more atmanirbhar?

By: Anshul Vipat

IndiaTracker looks at the journey of Modi government's flagship programme using data compiled by various ministries

The war-of-words has reignited the policy critique of the government’s flagship Production Linked Incentive (PLI) scheme, the programme that is in the front of current round of investments in the country. Launched in March 2020, the PLI scheme was created to incentivize foreign manufacturers to start production in India and incentivize domestic manufacturers to expand their production and exports. It aimed to increase manufacturing sector's share in GDP which has been hovering at ~17 per cent for the last few years. Initially aimed for mobile manufacturing and IT hardware, the PLI scheme was later expanded to include 10 sectors - electronic/technology products, pharmaceutical drugs, telecom, food products, white goods, solar PV modules, automobiles and components, battery, textile and specialty steel.

PLI's tenure is too short to critic or applaud. In addition, neither NITI Analog nor the government has released any real-time progress report nor do we have data on PLI-induced investment and jobs creations. Ignoring the political war-of-words, IndiaTracker looks at the journey of Modi government's flagship programme using data compiled by various ministries.

A hub for phones

The mobile manufacturing sector was the first one targeted under the PLI scheme. And it has shown resounding success. Under this initiative, the country produced mobile phones worth Rs 5,277 crore in FY22, more than double from Rs 2,334 crore in FY21. Thanks to the massive production, there was also a drop in the import of mobile phones at ₹600 crore during the first quarter, while it was as high as ₹3,100 crore during the same period in FY21. This also helped reduce our dependence on Chinese imports reduced to 60 percent from 64 percent in fiscal 2021, and is expected to fall further in the medium term. According to the ratings agency Crisil, mobile manufacturing will be an Rs 3.5-4 trillion industry by 2024. According to a recent report by Deloitte, the demand for smartphones in India is predicted to increase at a compound annual growth rate of 6%, from 300 million in 2021 to around 400 million in 2026.

However, there's a problem in the success. While it is true that mobile manufacturing has grown tremendously, experts believe manufacturing capabilities with a significant value-add have not been established in the country yet. This is because India’s manufacturing capabilities account for 20 percent value add in mobile phones, with the remaining 80 per cent being imported in the form of components and then assembled in the country. This means that the mobile phone is already 80 percent made by the time it arrives in India.

This is reflected in India's growing electronics trade deficit. Country's electronics trade deficit reported an increase of $41 billion. Imports of electronic components essential for mobile assembling/ manufacturing also increased 27 percent on-year.

Automobile manufacturing

Just like mobile phones, automobile manufacturing was one of initial boosters of PLI scheme. Included in September 2021, GoI set aside 54,000 crores as incentives for manufacturers under three categories - Rs 26,000 crores for production of electric and hydrogen fuel vehicles, Rs 18,000 crore for generation of new advance storage technologies for electric vehicles and remaining 10,000 crore for replacement of other types of existing vehicles with the greener vehicles.

While it is too early to predict anything, estimates indicates that there has been an increase in production of electric vehicles in the country. According to the data collected by VAHAN portal, a total of 90,014 EVs were sold in the first six months of 2021, which swelled to 2.23 lakhs in the six months. This year till September 2022, 6.37 lakh electric vehicles have made their way on the Indian roads. That's more than double compared to previous years.

In economic terms, the electric vehicle market is estimated that the was valued at USD 7,025.56 million in 2021, and it is expected to reach USD 30,414.83 million by 2027, registering a CAGR of 28.93% in terms of revenue during the forecast period (2022-2027). By 2025, it is predicted that India’s electric vehicle (EV) market will be worth Rs. 50,000 crore (US$ 7.09 billion). According to a CEEW Centre for Energy Finance report, India might have a US$206 billion market for electric vehicles by 2030. This will require investing US$ 180 billion in infrastructure for automotive production. Infact, major EV companies are targeting to manufacture 1 million electric cars a year for domestic sales and exports by 2026.

While it is too early to suggest whether the increased production in electric vehicles is due to PLI scheme or not, but certainly the automobile sector has been benefitted largely.

Pharmaceutical sector

India is the world's largest provider of generic medicines by volume, with a 20 percent share of total global pharmaceutical exports. It is also the largest vaccine supplier in the world by volume, accounting for more than 50 percent of all vaccines manufactured in the world. Overall, the Indian pharmaceutical industry is the world’s 3rd largest by volume and 14th largest in terms of value. Total Annual Turnover of Pharmaceuticals was Rs. 2,89,998 crore for the year 2019-2020, contributing around 1.72 percent of the country’s GDP and around 8 per cent to our total merchandise exports.

This was one of the primary reasons why pharma sector was selected for the PLI scheme during initial stages. The government will invest a total of US $2 billion from 2020–21 to 2028–29, to reduce import dependence, benefit domestic manufacturers, boost product diversification and innovation for development of complex and high-tech products. Special focus will be on gene therapy, employment generation and production of wide range of lower cost affordable medicines for consumers. With this, the government estimates to achieve incremental sales of US$4 billion or INR 294,000 crore and incremental exports of US$2.7 billion or INR 196,000 crore between 2022–23 to 2027–28.

There has been a definite increase in the pharmaceutical exports from India. According to data collected by India Brand Equity Foundation, pharma exports jumped from 20.7 billion dollars in FY 2019-20 to 22.4 billion dollars in FY 2020-21. It increased to 24.6 billion dollars the next year.

But there’s more than just exports. Thanks to PLI, 35 imported active pharmaceutical ingredients (APIs) or key chemicals that are responsible for the therapeutic effect of drugs, are now being developed in India. This has helped reduce our raw material dependence on China. Currently, close to 70 percent of critical raw materials are imported from China.

There has also been an increase in the Foreign Direct Investment (FDI) investment. In FY 2022 (April-September), the FDI inflows were ₹4,413 crore, 53% over the corresponding period in FY 2020-21.

Textile sector

PLI for textiles was introduced in September 2021. For textiles, incentives worth Rs 10,683 crore will be provided on production over a span for 5 years with the aim to promote the production of high value Man-Made Fiber (MMF) fabrics, garments and technical textiles. The government estimates additional employment opportunities of more than 7.5 lakh jobs in this sector and several lakhs more for supporting activities. It will also lead to fresh investments of more than 19,000 crore with a cumulative turnover of over Rs 3 lakh crore.

While it has been only nine months since its launch, prima facie the results seems positive. India’s textile and apparel exports (including handicrafts) showed a phenomenal 41 percent increase - from 30 billion dollars in 2021 to 44.4 billion dollars in 2022. Experts estimates Indian textile and apparel industry to grow at 10 percent CAGR from 2019-20 to reach US$ 190 billion by 2025-26.

Textile industry is the most volatile, price and technology sensitive industry. Up until 18^th century, India was the global hub of textiles, producing about 25 percent of the world’s industrial output. Bengal alone contributed more than 50 percent of total Dutch and English textile exports. The British Raj and rapid industrialization broke its back. Right until late 20^th century, textile exports was almost negligible. However, repeated government incentives meant that the industry started limping back on its feet. Slowly, but gradually.

Today, textiles has around 4.5 crore employed workers including 35.22 lakh handloom workers across the country. This sector is the second largest provider of employment after agriculture. Thus, the growth and all-round development of the textile industry has a direct bearing on the improvement of India’s economy.

Semiconductor industry

This is one industry that has been making noise in recent times. , which are used in a range of consumer electronic products such as mobile phones, laptops and cars Early this month, Vedanta, one of India’s biggest mining companies, and Taiwan’s Foxconn announced to set up semiconductor and display production plants in Gujarat. The joint venture will invest ₹1.54 lakh crore and is expected to create around 1 lakh jobs over the years.

India’s ambition to become the global leader for semiconductors was first felt during the COVID-19 global pandemic when lockdowns and restrictions globally resulted in a shortage of semiconductor chips which are used in a range of consumer electronic products such as mobile phones, laptops and cars. To accelerate its plans, the government announced a $10 billion incentive PLI programme for semiconductor and display manufacturers in December last year. While many believe the government woke up late, but it still could catchup with the world by keeping up with technological advancements.

India lacks substantial semiconductor fabrication capacity and the country’s requirements for chips and logic memory all have to be imported. In 2020, India imported 2.38 billion dollars of semiconductors, becoming the 13th largest importer of Semiconductor Devices in the world with over 68 percent of it from China. Imports increased 65 percent in 2021-22 from 2019-20, as per data from the commerce and industry ministry. Only 9 per cent of India’s semiconductor requirements were sourced locally last year, according to a report by the industry body Indian Electronic and Semiconductors Association (IESA).

In 2020, India’s demand for semiconductors stood at Rs 1.1 lakh crore. The demand is projected to increase to $80 billion by 2025, and $110 billion by the end of the decade.

India had previously attempted to have its own semiconductor capacity. However, it has been marred by factors like lack of sufficient capital, political uncertainty, government’s changing policies to customize incentives. When everything went right, a fire incident at a semiconductor factory in Punjab in 1984 gutted India’s dream to become a global chip manufacturer.

This time again, the government is trying to push the dream by making a biggest investment it had ever made for semiconductors. However, $10 billion incentive is lower than what other governments have planned. For instance, the United States had announced a $52 billion subsidy for companies that make chips in the US, while the EU subsidy plan amounts to $48 billion.

Still, India has an abundance of talent needed for the chip industry. The country has brightest minds, the required financial capital, huge consumer base and a government push. It’s just a matter of time, proper execution and planning. The semiconductor industry-led exports could well be another important sector for the government in its vision to scale up exports and contribute to nearly 10 percent of the export outlook by 2030.

The road ahead

Unlike previous investments, PLI smartly offers a simple and direct incentive based on incremental sales which will rapidly boost domestic manufacturing and attract large investments. India has gone with the traditional ‘piece rate’ method used by producers for several centuries. The biggest takedown of this scheme is its simplicity in its incentive construct. After a string of botched implementations, government seems to have got this one right. It just needs to ease investors’ way by further improving logistics, ensuring infrastructure and basic amenities and enabling companies to produce and get their products locally.