Making In India. But How?

PLI aims to create a manufacturing base. More evidence is needed before extending the scheme

- Raghuram Rajan & Rahul Singh Chauhan

An important element of Atmanirbharta is the Production Linked Incentive scheme (PLI), intended to create a sustainable manufacturing base in India. The scheme is being extended to new industries. Tariffs have been raised, and lakhs of crores have been promised as subsidies. Will it work though? More evidence is needed before GoI commits itself further.

What is PLI? It starts from the premise that India manufactures too little. But why is this so? GoI says, for example, that the electronics sector suffers a competitive disadvantage of around 8.5-11% on account of factors such as lack of adequate infrastructure in India, high cost of finance; inadequate availability of quality power; limited design capabilities in industry and its neglect of R&D; and the inadequacies in skills of Indian workers. Since addressing these weaknesses will take time, the government wants a faster alternative.

The cellphone industry offers an example of what is proposed.

First, custom duties on mobile imports were increased to 20% in April 2018.

This immediately increases domestic prices of mobiles, allowing producers to charge Indian customers more. For example, an iPhone 13 Pro Max is available for under Rs 92,500 in Chicago, US, inclusive of taxes while the same model with identical specs costs Rs 1,29,000 in India, a markup of nearly 40%.

Next, Gol introduced PLIS, which offer manufacturers a government payment of 6% in the first year for every cellphone produced in India, down to 4% in the fifth year, provided they meet incremental investment and sales targets.