Can a PLI program fly between sectors?

The Production Linked Incentive Scheme was introduced by the federal government in March 2020 to boost domestic manufacturing, reduce dependence on imports and make India a global manufacturing hub. While the scheme has seen significant success in some sectors, especially electronics manufacturing, its performance has been uneven in other sectors. With the government’s upcoming budget review and potential expansion of the PLI scheme, it is imperative to assess its current status and explore necessary reforms to make it more effective.

The PLI program was initially launched for three sectors – production of mobile devices and electrical components, pharmaceutical industry and medical devices. Encouraged by early success, particularly in electronics manufacturing, the program was expanded to 14 key sectors including textiles, cars and pharmaceuticals. According to recent reports, the program has attracted investments worth over Rs 1.07 trillion and generated significant employment and exports.

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PLI scheme: bright spots

Electronics manufacturing, especially smartphones, has seen a remarkable performance under the PLI scheme. The presence of major players like Apple and Samsung has boosted production and exports significantly. Apple’s production in India doubled to $14 billion in FY24, making it a key player in the global supply chain. This success can be attributed to the government’s tailored approach, which included extensive consultations with industry leaders like Apple.

While electronics manufacturing has seen significant success, other sectors, such as IT hardware, have struggled to replicate this performance. The initial assumption that the same strategies used for smartphones would work for IT hardware proved wrong. This sector required a different approach, and it wasn’t until 2023 that the government reworked the framework to better suit the needs of the industry. The example of IT hardware highlights the need for tailored strategies across sectors, rather than relying on a one-size-fits-all approach.

The pharmaceutical sector, a critical area for India, has also benefited from the PLI scheme. Investments in active pharmaceutical ingredients (APIs) and key starting materials (KSMs) have strengthened India’s position as a global supplier of generic drugs and vaccines. This move has reduced the sector’s vulnerability to supply chain disruptions and strengthened its self-reliance. However, despite these positive developments, the pharmaceutical sector still faces challenges, particularly in attracting sufficient private investment.

The government is aware of this issue and is considering extending the PLI scheme for bulk medicines to 2028-29 from 2027-28. The aim of this extension is to provide businesses with a longer runway to expand their production capacity and fully realize the benefits of the scheme.

Challenges and the need for reforms

Despite these successes, other sectors have not shown the same progress. Reports indicate that sectors such as textiles, steel and automotive have seen slower-than-expected growth. This discrepancy highlights the need for a more differentiated approach to the PLI scheme.

One of the key issues identified is the delay in processing applications for incentives that are currently paid annually. Moving to a quarterly payout system could reduce delays and provide companies with more timely support, thereby supporting continued growth and investment throughout the year. Moreover, switching to a quarterly payout model not only speeds up the incentive process, but is also more in line with many companies’ business cycles.

This change is expected to improve cash flow management for businesses, enabling them to reinvest in their operations more quickly and efficiently. The proposed quarterly payments are expected to streamline administrative processes and reduce bureaucratic bottlenecks, thereby making the program more attractive to potential investors.

The one-size-fits-all approach of the PLI scheme has not worked uniformly across sectors. Tailoring incentives to the specific needs and dynamics of each sector is key. For example, much of the success in electronics manufacturing has been the result of tailored approaches by major players like Apple. Similar sector-specific strategies should be developed for other industries, given their unique challenges and opportunities. The textile sector, in particular, has struggled to gain momentum under the current PLI framework.

The textile ministry is advocating for greater flexibility under the scheme, including adding more product lines to attract a wider range of applications and investments. This sector-specific adjustment aims to rejuvenate the textile industry by adapting its unique production cycles and market requirements, ultimately fostering a more competitive and dynamic manufacturing environment.

The government is considering new PLI schemes for labor-intensive sectors such as garments, toys and footwear. These sectors have the potential to create significant employment opportunities and drive economic growth. A focused approach to encouraging these industries can help achieve the twin goals of job creation and industrial development.

Challenges such as the lack of uniform criteria, the ambiguity of remuneration systems and the lack of a centralized database hamper the implementation and transparency of the program. Establishing clear guidelines, maintaining a centralized database and ensuring consistent criteria across sectors can improve the effectiveness of the program and attract more investment. Moreover, increasing the transparency of the PLI scheme requires a robust mechanism for tracking and reporting progress.

Creating a centralized database would facilitate real-time monitoring of investment flows, production increases and incentive payments. The database should be accessible to both decision-makers and the public, supporting accountability and enabling the schema to adapt to the data. Clear, consistent criteria across all sectors will ensure fairness and predictability, encouraging more companies to participate and invest in the initiative.

High raw material costs and supply chain inefficiencies are other significant challenges. For example, manufacturing containers in India is more expensive compared to China due to the higher cost of corten steel. Addressing such issues through policy support and infrastructure development is essential to increase competitiveness.

The PLI program has demonstrated its potential to transform India’s manufacturing landscape. However, to maximize its impact, a strategic overhaul and focused expansion are necessary. By addressing current challenges and aligning incentives with the specific needs of each sector, the PLI program can drive sustainable economic growth, reduce import dependency, and position India as a global manufacturing powerhouse. The upcoming Budget Review provides a key opportunity to implement these reforms and ensure the program’s long-term success.