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PLI scheme: The way forward
Articles- Nov 28,23
The Rs 2.71 trillion Production-Linked Incentive (PLI) schemes, rolled out to promote the economic development of various sectors, have faced multiple implementation challenges. Bhavesh Thakkar summarises such challenges and also presents the way forward.
Central and state governments have been releasing various policies to promote various sectors, leveraging the employable workforce for India’s development. In this regard, the central government has introduced the Make in India and Atmanirbhar Bharat initiatives, to attract Foreign Direct Investments (FDIs) and to promote manufacturing within Indian corporates. State governments also announce policies to attract investments in their state, promoting a healthy competition for growth among states. An investor can combine such state and central incentives to significantly reduce the investment’s payback period, thereby, multiplying the schemes’ overall benefits.
With time, the governments have recognised the need for a holistic development across sectors and in this direction the Product Linked Incentive (PLI) scheme announced by the central government in 2020 is considered as a breakthrough measure.
The objective of PLI is to make domestic manufacturing globally competitive and to create global champions in manufacturing. The strategy behind the scheme is to offer incentives on incremental sales, over and above the base year on activities specified in the policies. The advantage of incentivising these incremental sales is that it helps the central government to effectively measure the economic outcome of the incentives, as opposed to just offering capital benefits without tracking any actual value addition.
Thus, PLI has been specifically designed to boost domestic manufacturing in sunrise and strategic sectors, curb cheaper imports and reduce import bills, improve cost competitiveness of domestically manufactured goods, and enhance domestic capacity and exports.
Objectives underlying the sector selection
The PLI schemes formulated to drive economic transformation have certain broad objectives. Let us deep dive into the intricacies of each of the objective:
- Employment generation: The introduction of the PLI scheme stimulates economic growth by fostering job creation in India. By incentivising industries, PLI not only enhances productivity but also offers significant employment opportunities, contributing to the nation's workforce expansion and economic prosperity.
- Import substitution and export promotion: The PLI scheme is a dual-purpose initiative that not only diminishes import dependency but also propels export activities. Incentivising domestic production curtails reliance on imports and fosters economic self-sufficiency. Simultaneously, it provides extra advantages for exporters, making it more attractive for businesses involved in international trade. This import substitution and export promotion strategy not only safeguards against excessive forex outflow but also actively encourages and rewards businesses that contribute to the growth of India's exports, thus promoting a more balanced and robust economic landscape.
- Creation of large-scale domestic manufacturing capacity: The PLI scheme focuses on creating large-scale manufacturing capacities and it is essential for India's economic advancement. It stimulates innovation, attracts investments, and enhances our global competitiveness. With a robust manufacturing sector, India will secure a lasting positive impact, sustained economic growth and prosperity on the international stage.
Industries covered under PLI
The initial tranche of the scheme was launched in April 2020 and focused on 3 sectors, namely pharmaceutical (critical key starting materials (KSM) / drug intermediaries (DI) / active pharmaceutical ingredients (API)), mobile and electronic components, and medical devices. The government then expanded the scope and introduced multiple other sectors. Today, the scheme consists of fifteen sectors. These sectors range from traditional ones such as the textile to sunrise sectors such as semiconductor and pharmaceutical drugs.
The overall budgeted outlay of the incentives is Rs 271,501 crores, with the highest allocation to the high in demand semiconductor sector. Table 1 gives a glimpse of the sector wise allocation percentage to the covered PLI sectors.
Current process of PLI
The central government, to efficiently execute the evaluation, approval and disbursement process, has appointed the Project Management Agency (PMA). The PMA works under the respective sector departments to smoothly execute the process.
The broad selection criteria/scoring system considered by the PMA for evaluating a proposal covers:
- Financial aspects: Previous years turnovers, export turnover, net worth details, future investment and cash flow projections. The objective here is to evaluate the financial strength of the applicant to execute the proposed investment.
- Technical aspects: Criteria such as, minimum domestic value addition and employment generation, form a part of the technical criteria. These criteria evaluate the eligibility of the proposal.
- Sector specifics: Qualitative sector specific factors are identified in every PLI policy, for example, for the pharmaceutical drugs PLI, the proposal requests for details of the number of patents enlisted and the R&D spend by the company.
Below is the application filing process flow:
- Interested applicants may apply on a specified portal, detailing their investment proposal (particularly the committed investment and projected turnover).
- Then these proposals are evaluated by the authorities through the scoring system defined above. The selected applicants from the evaluation process are issued an approval letter.
- The conditions of the approval letter must be complied through quarterly review reports and responses to any queries.
- At specified intervals (usually annually), the incentives claim application must be filed along with the appropriate documentation.
Upon receipt of the approval letter, applicants are provided specified timelines to meet their investment commitments. The Ministry/Department, through the PMA, undertakes continuous and timely monitoring of the applicant’s progress, with physical verification of the project premises and interventions in the form of queries as necessary. Proper documentation needs to be maintained to provide accurate progress reports. After meeting the commitments set by the applicant’s proposal, the department disburses the incentives as a cash subsidy.
Challenges faced while implementing PLI schemes
The PLI Schemes, expected to roll out benefits and promote the economic development of various sectors, have faced multiple implementation challenges which are hampering their motive. Here is a summary of such challenges:
Domestic value addition criteria: The PLI schemes provide incentives to applicants on fulfilling the Domestic Value Addition (DVA) criteria wherein a certain percentage of inputs used in the manufacturing process are to be procured domestically. In some of the sectors, this DVA criteria is set at a high percentage. For instance, the PLI for auto and auto components requires a minimum 50 per cent DVA. For auto and for multiple other sectors, the current ecosystem does not support an indigenous raw material requirement, necessitating import of input materials and leaving the DVA criteria unfulfilled. And this will make applicants large investments ineligible under the schemes.
Stringent and difficult to accomplish growth criteria: The lack of infrastructure availability and logistic connectivity is derailing the defined timeline of implementation of the schemes. And, given the global sluggish economic outlook, the availability of funds for investment is low, negatively impacting the investment commitments from the industries. Furthermore, expansion criteria required in the policy are stringent, and industries have not been able to accomplish them. For instance, the 25 per cent YoY sales growth criteria specified for the textile sector is too harsh for textiles, which see a steady annual growth of 8 to 9 per cent.
Delays in application and disbursement process: Many companies that have applied for the scheme are concerned about their ability to meet the government's requirements due to the lengthy, burdensome, and complex procedure to claim incentives. For example: the automotive PLI was announced for a period of 5 years, but the policy and guideline drafting took a substantial time and the effective period available for the industry was narrowed down to 3.5 years and is now expected to be extended for a year. Such delays effectively reduce the scope of benefits available to the applicants.
Additionally, the application process is not user friendly and requires multiple levels of documentation; thus, delaying the disbursement of incentives. In this regard, consider the disbursement flow for FY 2022-23. Out the budgeted outflow, the departments only disbursed Rs 2,900 crore in FY 22-23, and this accounts for merely 1.07 per cent of the total budgeted allocation detailed in Table 1. This low disbursement percentage reflects as a negative aspect for potential investors.
Ambiguous guidelines: The PLI scheme is in the nascent stages and there have been issues related to ambiguity of relevant business terms. An example would be the electronics PLI wherein, definitions for key business transactions were not included in the guidelines. A leading electronics manufacturer, for instance, exported some products to related parties and the pricing for related party was not defined, thereby, affecting the eligibility of incentives. Given that the scheme is new, such unforeseen issues cannot be identified beforehand, but once identified, faster resolution for the same can be targeted.
Way forward
Looking ahead, it would be beneficial for the government to enhance transparency and facilitate open communication with investors by releasing a comprehensive white paper. This document should outline the status of policies, including details on received applications, granted approvals, and investments made in line with the accepted proposals. Such transparency can help assess any deviations from targeted goals and allow for constructive discussions on streamlining processes for mutual benefit.
On the investment front, the next steps should entail the inclusion of diverse investments, irrespective of greenfield or brownfield categorisations, and inclusion of diverse investor categories. This will allow a higher foreign direct investment in the country easing the forex rates in short term and promoting sustainable development in the long term. A positive step in this direction is the inclusion of the MSME (micro, medium and small enterprises) segment as a beneficiary of the PLI policies.
Challenges faced by the industries should be heard and understood, and appropriate remediations should be discussed and implemented for issues such as high administrative burden or lack of flexibility in the PLI guidelines.
Once the government evaluates the current schemes’ effectiveness and takes corrective actions, they are considering the expansion of the PLI basket. There have been discussions on extending the scheme to the following areas:
- Petrochemicals
- Wearables and hearables
- Basic chemicals
- Toys
- Data centres
- Compressed biofuel
- Furniture
- Research–based
These sectors are shortlisted basing the employment opportunities and self-reliance goals underlying India’s development. Along with the recommended changes, the government should implement a robust implementation mechanism and framework to enable investments in the sectors.
About the author:
Bhavesh Thakkar is the Partner (Tax and Regulatory), Indirect Tax, at Ernst and Young LLP India. He has been extensively involved in advising multinational and domestic companies across a range of sectors such as manufacturing and automobile. A chartered accountant, he has 23 years of professional experience specialising in providing end-to-end services in relation to the fiscal incentives by state and central government. He has specialised experience with PLI schemes across sectors.
This article was co-authored by Vaishnavi Luniya and Anup Rathi ( who are Consultants at EY).
Production-Linked Incentive scheme
PLI Scheme
Bhavesh Thakkar
Ernst and Young
Vaishnavi Luniya
Anup Rathi
electronics manufacturing
Indian manufacturing sector
Domestic value addition
Make in India
Atmanirbhar Bharat
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