Rajya Sabha TV – Big Picture – 06 March 2021– Production Linked Incentive Scheme – Boost to manufacturing sector
PLI Boost to manufacturing sector
- Government is focusing on manufacturing sector by trying to speed and scale through various strategies with the Production Linked Incentive Scheme (PLI) for the several product lines in this particular sector.
- Importance of PLI to the manufacturing sector and overall economic growth of the country-Scope of things to be done in manufacturing sector and how will it help.
Background of PLI
- Since Independence, India has seen the transformation from agrarian economy to more service oriented economy from 52 % GDP in agriculture which is now less than 20% where as in service sector it is more than 55%.
- In between the manufacturing sector is left stuck from decades at the rate of about 16 percent of GDP.
- Construction sector adds 28 % to the GDP.
- So these two secondary sectors which can provide quality jobs have not grown as much as they could have.
Reasons for this underdevelopment of these two sectors are manifold and some of them are:
- Burden on Industry – Industry is burdened with multiple taxes, tariffs and cross subsidies, high cost of capital and regulatory overdose.
- To make manufacturing competitive and to scale up production there is a need of production of internationally competitive products catering not domestic and export demand.
- To remove the burden of taxes and tariffs, taxes can be offloaded on exports but not by subsidising export directly which is against WTO rules.
- Therefore, PLI scheme provides additional incentive, over and above any other existing incentive, like a cash back from GST.
- In 13 sectors PLI scheme has been approved by government so if in these sectors the baseline production let’s say from 1920 any industry has sold over and above some incremental sales, the sales that industry makes in next five years, it will be given a percentage which will vary from sector to sector.
- For e.g. If Industry sell 100 Crore, it will get 5 crore cash back and with this calculation if the total PLI incentive approved by the government are expected to be dispersed this two lakh crore ( given in the budget) and if 5 percent is provided back on an average then the industry makes 40 lakh worth of sale in next 5 years which is as much as 20 percent of GDP.
- If the industry spreads in next 5 years which amounts for 4 percent GDP every year from 16 to 20 percent. Therefore, these are the broad calculations.
- Biggest sectors included in this scheme are Automobiles, Mobile and Electronics, Advanced batteries, Pharma and some of more employment incentives in terms of food processing and textiles.
Industrial perspective in the entire manufacturing sector in the present scenario-
- The Manufacturing sector is being constant at around 16 % of the GDP and Government aims to take it to 25%. To reach this target government identified 13 sectors to start with which is going to help these sectors and MSMEs.
- India is not able to move up in manufacturing because the focus must be on compliances and let manufacturing expand over all the sectors because more the manufacturing more the employment.
- If it goes across all the sectors the export amount will be more than 40 lakh as per the aforementioned calculation.
- India requires to be positioned in the world in this way export will increase and the domestic consumption too.
- Two sectors – One is Food processing which is a very critical sector and India can be a food factory to the world.
- India is a top ranker in many food items but the value is not added to this position because there is a food loss about 30 percent while the processing is less than 10 percent.
- If this gap is fulfilled, there is a huge potential of food process industry and it would provide employment and will give more income to farmers also.
- It can be broadly said that what IT sector has done for urban India. Food processing will do for rural India.
- Second is- The packaging Industry. If food has to reach India and overseas, its important packaging industry work along with food processing Industry and both has to go along and incentivized by the government.
The concept of minimum government and maximum governance and its implementation on various levels and sectors-
- Steady work is going on by the central government in collaboration with state government with the spirit of competitive federalism by introducing state rankings for ease of doing business.
Some of the mechanisms adopted by governments are:
- Centralized registrations- to do away with multiple registrations.
- Automatic, time-bound and deemed approvals.
- Inspection regime- risk based inspections which are registered, centrally generated and are risk profiled to give a boost to the industry and just not being arbitrarily targeted.
- Extent of regulation have to be fairly and equitably applied without arbitrary dose of application.
- Where there is an approach to risk based inspections, more than the regulatory compliance, there is an inclusive cost too. So, lots of work is required to be done in this regard and if its not done then there is a risk that PLI 5 % itself may not be sufficient to attract the manufacturers because if then the benefit is taken away by the increase in cost of various burdens both institutionary and non- institutionary.
- Therefore, 5 years time is a window during which the cost and ease of compliance must be improved, so that the bulk of the 5 % becomes additional post tax income to the industry.
Suggestive measures from the Industrial point of view to implement for the ease of doing business and cost of reducing the compliance-
- Work is going on reducing governance and maximising the compliance.
- More focus is on digital economy- By using digital technology focus can be more on production and productivity rather than on spending time on compliance.
- Ease of doing business is the key for India so it's important that inputs from, funding, energy, power and logistics all these costs have to go down.
- India is a very high cost economy by paying an interest rate average10% -12 % while internationally that is 2%-3% or linked with LIBOR. So, it’s need of an hour to consider the cost of energy and cost of doing business.
- On one hand India is opening the economy and entering into the free trade agreements and getting into the goods but on the other side competitiveness of the Indian Manufacturer must be increased.
- Regarding compliance India must move towards self regulation, self attesting and self certifications.
- Reforming the labor laws big step government has taken.
- India is mainly driven by MSMES which provide main employments and other units which are there. They are unaware about the statutory laws and compliances. Initiatives must be provided so that they can focus on product and productivity which is very important for India, today.
Road ahead of entire manufacturing sector-
- More than 99 % of the business and manufacturing ecosystem is MSME and deregulation will provide scope for its scaling up which is very much required for economic logic.
- Apart from the cost of regulation, rationalization of taxes and the tax burden incidence falls on only few commodities, businesses and entities because base is low and is not equitably distributed over a large name.
- Therefore, digitalization, formalization, broadcasting of taxation will take care of many of the disincentives.
Coordination of Government and Industry
If manufacturing industry has to grow, they have to look at
- producing best quality goods,
- participation in R & D,
- upgrading on the manpower skill and
- on the use of new technology
- Government have to see that we do not have non- tariff barriers which do restrict the import of the goods into the country.