FEW TAKERS FOR PLI SCHEME MEANT TO ENERGISE ‘MAKE IN INDIA’ CHANGE IN INCENTIVE APPROACH ALSO FAILS TO ENTHUSE

Make in India has lost steam. Prime Minister Narendra Modi flaunted success stories from the rampart of Red Fort in the Independence Speech in 2019. Several attempts were made to rejuvenate Make in India, invoking major reforms like reduction in corporate taxes, land reforms at state level and downsizing cumbersome procedures by encompassing major labour laws. But, they all failed to unleash a positive impact on manufacturing growth.

PLI (Production Linked Incentive) is a new challenge aimed at giving a new lease of life to Make in India. It overrides Make in India by doling out direct incentive through sales. Hitherto, reforms were made to push Make in India by stepping up Ease of Doing business, reduction in corporate taxes, adopting digitization and others, which connote indirect measures.

Damaged by the unprecedented COVID-19 pandemic, global manufacturing witnessed dramatic changes. GVC (global value chain), which accounts for 70 percent of international trade and investment, is in retreat and protectionism is on the rise. USA, the global hub for consumption, headed for protectionism under the Trump philosophy of America First and China – the global hub for GVC manufacturing – is losing steam with foreign stake holders shifting to other low cost manufacturing areas in South East Asia.

India decided to transform its manufacturing, following the new global trajectory of growth. The Economic Survey 2019-20 underpinned the need for transformation in manufacturing. It advocated the country to be made the global hub for assembly operation and value chain manufacturing. To this end, focus on PLI and encouragement of MSMEs to play greater role has been the main mantra to rejuvenate manufacturing.

India has the advantages for becoming a potential platform for value chain manufacturing. It has cheap and abundant labour. This was advocated by Professor Arvind Panagariya, saying “India is abundant in labour and assembly of products. It must specialize in these activities across a large number of products.”

To this end, India doled out a mega fiscal incentive to MSMEs in last May. But, it failed to rejuvenate manufacturing. Domestic investment plunged. It nosedived by over 42 percent in 2020-21, from the growth of 19 percent in 2019-20, according to CMIE. This shows that fiscal incentive was not propitious for the challenges to recover from the pandemic.

PLI is the second major attempt to boost manufacturing. But, this too has lost much attraction, analysts observe. There were few takers for the scheme. Generally, every scheme is launched with fanfare, but peter out soon. Lack of transparency, red tape and cumbersome procedures bar practical application of the policy. Lack of fundamental reforms in bureaucracy is the major drag on implementation of the schemes. In India, bureaucracy pivots on Rule Base, adopted in 1986. In Japan, bureaucracy is the guardian of people interests. PLI scheme is feared to fall prey to the Rule Base bureaucracy.

The current PLI scheme is not new. Its origin is traced back to the Phased Manufacturing Programme (PMP) in electronics in 2015-16. The National Policy in Electronics, launched in 2019, embodied three schemes for electronics. One of them was Production Linked Incentive Scheme (PLI). Others were Scheme for Manufacturing Electronics Components and Semi-Conductors (SPECS) and Modified Electronic Manufacturing Clusters Scheme (EMC 2.0). The new PLI is an extended scheme to boost manufacturing in various sectors, covering 13 industries.

Official sources claim that the electronic industry has made a rapid growth over the past 3-4 years. One of the factors attributed to the growth was PLI scheme. Production of electronic goods reached Rs 4,97,484 crore in 2020-21 from 4,58,006 crore in 2018-19. India’s share in the global electronic manufacturing increased to 3.6 percent in 2019 from 1.3 percent in 2012. This places the country as a potential harbour for digital economy.

Nonetheless, this trajectory of growth in electronic manufacturing does not reflect the impact of PLI, critics argue. The reality is different. Surge in the growth of electronic industry was mainly due to mobile phone production, while other areas of electronics witnessed adverse growth. The growth in mobile manufacturing was triggered by Chinese manufacturers, which made a foray in the country. Chinese manufacturers made debut with Modi rolling out the red carpet to encourage FDI irrespective of the political face-off with Beijing. The main attraction for the Chinese firms to invest was the demographic advantage of India and the rising protectionism through high tariff. Against these backdrops, eyebrows were raised over the success of PLI, as claimed by government.

Another major concern of the PLI scheme, which held back the manufacturers, is the WTO backlash under ASCV (Agreement on Subsidy and Countervailing Duty). The PLI scheme mandates localization in mobile phone and some IT hardware manufactures, such as laptops, PCs, starting from the second year. WTO prohibits discrimination in localization between indigenous and imported products. To this end, some big manufacturers distanced from the scheme, as the WTO backlash cannot be ruled out.

It brings us to a lesson that can be learnt from Vietnam, which is emerging in the global map for manufacturing. Vietnam has become the second biggest destination for imports of electronic and telecommunication items after China. Supporting Industry has been the backbone for the growth of manufacturing industry in Vietnam. It involves materials, accessories, components and spare parts used for assembling finished products. According to a survey, the localization in Japanese investing firms in Vietnam is as high as 34 -35 percent and is making rapid growth after the Japanese firms shifted to Vietnam during the COVID 19 pandemic.