In early 2021, when the government was planning to extend the production-linked incentive (PLI) scheme that it introduced in 2020, India’s air-conditioner (AC) manufacturers met Guruprasad Mohapatra (since deceased), then secretary of the Department for Promotion of Industry and Internal Trade (DPIIT). The delegation, led by Kanwaljeet Jawa, MD & CEO of Daikin Airconditioning India and President of the Refrigerator and Air Conditioner Manufacturers Association, sought a slice of the flagship scheme to make India self-sufficient in AC manufacturing. Soon after, stakeholders like NITI Aayog, Invest India and the commerce ministry were roped in. By early-November 2021, 26 companies—including Blue Star, Havells, Voltas, Johnson Controls-Hitachi, and Daikin—secured approvals on their investment proposals, and things started to move.
This example showcases the government’s desire to engage with industry in finding ways to make a complex, and critical, scheme work. Designed to incentivise manufacturing across 14 sectors, PLI has become a rallying point for the government’s desire to promote local manufacturing and turn India into a global exports hub. The fundamental premise is for manufacturers to pump in money to increase production in their factories (new or old), and then for the government to pay back a share of the value of incremental production over a five-year period. In the process, the government hopes to create 6 million jobs between 2021-22 and 2026-27 (per a written submission in the Rajya Sabha by Rameswar Teli, Union Minister of State for Labour and Employment) and add more muscle to India’s GDP.
The government is going to spend nearly Rs 2 lakh crore in incentives, which would be on average, 5 per cent of the incremental production. This means, the GDP is set for a $520-billion boost through PLI over the period
G20 Sherpa and former CEO
The potential is big. An analysis by S&P Global’s CRISIL Market Intelligence & Analytics (MI&A) says the scheme could attract Rs 2.76 lakh crore worth of capex from the private sector over seven years—2020-21 to 2026-27. That is expected to help increase India’s average industrial capex to Rs 5.7 lakh crore a year between 2022-23 and 2026-27, from Rs 3.7 lakh crore a year in the previous five years. It would also enable private capex to form 9 per cent of the country’s total capex over the next five years.
Sounds good? It does indeed. Sounds easy? It certainly is not. Any scheme that banks on building manufacturing capacity will take time to fly because it takes time to set up that capacity, especially when it involves hundreds of companies across 14 industries. Then, each industry has its own lobbies and nuances, and their demands can create conflicts and tangles with the government’s own needs and objectives, especially given that the scheme is being implemented by multiple ministries and departments. It is, therefore, no surprise that several fundamental issues dog the PLI scheme even three years after it was introduced.
Government officials BT spoke with are optimistic about the prospects of the scheme. “The Covid-19-related disruptions impacted the PLI in the initial phase as they delayed investments, setting up of plants by manufacturers and their projected targets. But with economic activities now back to normal, 2023-24 will be the first year of production for many large sectors,” a senior official tells BT on condition of anonymity. In line with CRISIL’s estimates, the government expects the incentive payout to peak in 2025-26 and 2026-27.
While both government and industry are hopeful of things improving from FY24, the path ahead is strewn with thorns and potholes.
Slow and Unsteady
Let’s take a look at the caveats. First, the contribution of PLI to GDP is a matter of debate. “The government is going to spend nearly Rs 2 lakh crore in incentives, which would be on average, 5 per cent of the incremental production. This means, the GDP is set for a $520-billion boost through PLI over the period,” Amitabh Kant, G20 Sherpa and former CEO of NITI Aayog, tells BT. But industry experts are circumspect. According to Mohammad Athar, Partner-Economic Development and Infrastructure at PwC India, average incentives across the 14 sectors could be higher than 5 per cent. “For certain sectors, the incentive could be as high as 8-12 per cent compared to the average 4-6 per cent for others. Which means the extent of jump in production may not be 20 times of the total incentive offered by the government,” he says. Essentially, if the discount (incentive) given by the government is higher than 5 per cent, the value of the incremental production will not be 20 times, because the multiple exceeds 100 per cent, which isn’t possible.
Second, implementation has been slow thus far, perhaps expectedly, but slow nonetheless. In 2021-22, the government spent just Rs 10 crore in incentive payouts (for mobile handsets, white goods—ACs and LEDs—and food processing industries put together), reflecting marginal increase in production. In 2022-23, as per DPIIT, this number rose to Rs 2,874 crore. That’s a big improvement, sure, but a scale-down from the Rs 8,504 crore initially allocated across seven sectors in the Union Budget for FY23, and even from the revised estimate of Rs 4,821 crore. Effectively, the first two years of the seven-year exercise saw a mere 1.46 per cent of the total Rs 1.97 lakh crore incentive outlay being paid out. “The scheme was introduced in 2020-21 and, ideally, it should have peaked by now and achieved its purpose by 2025-26. However, large-ticket industries are either yet to adopt the scheme or begin major activities under it. We now estimate that the peak incentive payout would take place only in 2026-27 and PLI would continue at least till 2028-29,” says Hetal Gandhi, Director-Research at CRISIL MI&A.
To further enhance the [PLI] scheme, implementation of mandatory incremental sales of 7 per cent YoY needs to be applied specifically to the selected, approved products eligible for benefits
ED, Global CFO and Head of Corporate Affairs
Third, as Gandhi points out, five large industries are yet to take off. Automotive, ACC (advanced chemical cell) batteries, specialty steel, solar PV and textiles are expected to invest Rs 2.21 lakh crore or 80 per cent of the overall estimated PLI capex. Of this, an estimated Rs 1,23,457 crore has been committed so far. One reason could be that low-capex industries are getting higher incentives in percentage terms. Mobiles & electronics, telecom and food processing companies are slated to get 20 per cent, 6.5 per and 6 per cent of the total incentive outlay, even though their contribution to the PLI capex are estimated to be only 4.5 per cent, 1.5 per cent and 2.2 per cent, respectively. In comparison, the five large industries would receive incentives in the range of 4-14 per cent. So it is that of the Rs 8,883-crore budgetary allocation for PLI incentives in FY24, 52 per cent has been marked for mobile and electronics manufacturing, 17 per cent for food processing, 13.5 per cent for pharmaceuticals and medical devices, and 9 per cent for telecom equipment, with the remaining sectors receiving marginal amounts. Or nothing. According to experts, lower or no allocation to a sector indicates the authorities’ estimate of poor activities in those industries. And that is a worry because some of these sectors are part of the five big guns that are expected to drive maximum capex within the scheme.
Fourth, the slow start has also meant lower number of jobs created. Against the projected 6 million new jobs over seven years, only some 300,000 jobs (or 5 per cent of the total) have been created between 2020 and early-2023 through the various PLIs, according to Parameswaran Iyer, former CEO of NITI Aayog.
Finally, it’s one thing to be promised an incentive, and quite another to actually have the government’s cheque roll into the bank. As per CRISIL MI&A’s analysis, 56 per cent of the proposed incentive payout is “linked to stringent incentive criteria”. While in areas like mobile, telecom, white goods, medical devices and food processing, the criteria are “less stringent”, for industries like specialty steel, solar PV and bulk drugs, the criteria are “highly stringent”. These, say experts, may hamper the capex plans of companies that avail the scheme. Plus, the methodology of incentive calculation is a bone of contention between the government and the private sector, across industries. “If the operationalising of incentives based on the actual output can be done in a more transparent manner, that will be helpful,” says Athar from PwC. “Doing it digitally will cast aside any doubts among manufacturers. After all, many of the companies have incorporated the PLI benefits in their capex plans, which may be jeopardised in case there are obstacles.”
Now let’s take a deeper look at the challenges that different industries face in the PLI scheme.
Some mixed messages are emanating from PLI. For instance, since 2014, the government has aggressively pushed for a massive jump in local manufacturing of mobile handsets and electronics, but PLI has changed the game. “Under previous schemes (such as Phased Manufacturing Programme or PMP), increasing value addition through local component production was a key factor. In PLI, however, the incentives are based on increasing finished units, and this may lead to manufacturers deviating from building a local ecosystem of components [to local assembly instead],” says a senior executive from a leading global component manufacturer. This possibility has prompted economists like former RBI governor Raghuram Rajan to question whether India is actually manufacturing mobile phones or merely assembling them. However, refuting Rajan’s analysis, Minister of State for Electronics and IT Rajeev Chandrasekhar said in a detailed social media post that assembly is the first step towards greater value addition. He also wrote that India’s performance is “far better than what China was able to do in its first four to six years of mobile manufacturing”.
Focussed on AC component manufacturing, the PLI would alter the order of the game, where today Indian manufacturers lag behind their Chinese competitors
MD & CEO
Daikin Airconditioning India
PLI may still end up meeting both targets, argues Pankaj Mohindroo, Chairman of Indian Cellular and Electronics Association. “The goal is to place India on the global map by growing exports of mobile handsets from India. As manufacturers scale up production and fight to capture global markets, the component ecosystem would grow naturally since they would have to remain competitive in terms of pricing,” he says. Nearly Rs 11,000 crore worth of proposed investments were approved in October 2020 from five global firms (Foxconn Hon Hai, Wistron, Pegatron Rising Star and Samsung) and five local companies (Lava, Micromax, UTL Neolyncs, Padget Electronics and Optiemus Electronics). Yet, the deadline for PLI for mobile handsets to end was extended by a year to 2025-26 as poor disbursal of incentives and lack of clarity on incentive calculation led to protests by manufacturers like Samsung and Padget. In spite of their initial commitments, only Samsung managed to achieve the target in 2020-21. And even after the extension, the dispute over incentive calculation and disbursement between the manufacturers, including Samsung, dragged till end-2022.
Indian Cellular and Electronics Association (ICEA)
Disputes over incentives continue to affect other sectors as well. In telecom, PLI was planned for the period 2021-22 to 2025-26. However, lack of interest from enough manufacturers of telecom gear and disagreement over incentive outlay forced the authorities to extend the scheme till 2026-27 and offer 1 per cent additional incentive for design-led local manufacturing. While 42 companies finally received approval in late-October 2022, only Rs 1,330 crore out of Rs 4,200 crore worth projected capex has been invested since April 1, 2021, data from Cellular Operators Association of India (COAI) shows.
In automotive, the largest PLI sector, disagreement over incentive calculation continues to impact progress. Approvals for investments worth Rs 74,850 crore were given to 75 companies, but of the Rs 25,938-crore total incentive outlay, only Rs 11 crore was disbursed in FY23, and just Rs 604 crore has been allocated for FY24. Plus, manufacturers are concerned over the prolonged list of details required to claim benefits, and authorities are tightening their scrutiny to address leakages. “It has come to our notice that some of the electric two-wheeler makers have wrongfully claimed subsidies under FAME II Initiative. We don’t want that to repeat in PLI,” says an official.
Then, the list of eligible auto products can be amended over time. As Biren Vyas, Partner-Tax at Grant Thornton Bharat, points out in a report, in case an applicant is not able to achieve the turnover and investment criteria due to alteration of this list, the Ministry of Heavy Industries may invoke the bank guarantee furnished by the applicant. A changing list might also require more investments. Plus, the requirement of at least 50 per cent domestic value addition is a challenge for many as India remains dependent on import of key components like lithium-ion batteries and semiconductor chips.
Notified in July 2021, PLI in steel is focussed on boosting local production of value-added and specialty steel to 43 million tonnes a year by 2028-29 from 18 million in 2019-20. However, with little interest from steel manufacturers, the MoUs (memoranda of understanding) could only be signed in March 2023. The 27 companies that got approval have committed Rs 30,000 crore capex, which experts say falls short of PLI’s objective. According to Vipul Prasad, Founder & CEO of Magadh Capital Advisors, to bump up the capacity by 25 million tonnes a year, nearly Rs 2 lakh crore worth of capex would be required. “To add one million tonnes of capacity by setting up new plants, on average $1 billion (Rs 8,200 crore) is required. So, currently they are on course to set up just a part of the overall 25-million-tonne target,” he says.
Cellular Operators Association of India (COAI)
The government is now planning to introduce PLI 2.0 for steel, which industry veterans feel would help in meeting the rising demand for stainless and alloy steels. “However, some adjustments are necessary,” says Vijay Sharma, Director at Jindal Stainless (JSL). “As stainless and alloy steels are low-volume but high value-added items, the threshold investment levels in PLI 2.0 need to be significantly lower as compared to PLI 1.0. Also, since both stainless and alloy steels are meant for high-end applications, the highest band of PLI incentives should be made applicable for PLI 2.0.” Poor return on investment is also a key concern. “Over the years, average rate of return for many of these companies has rarely been over 10 per cent, which is relatively lower than the return required to make the business viable in the long run. So, the 4-6 per cent incentive offered under PLI would help them sustain in the initial years, but what happens once the incentives stop after the five-year period?” argues Prasad.
Now let’s get back to where we started, with ACs. The committed investments of Rs 3,898 crore (Rs 4,614 crore after including Rs 716 crore from LED makers) fell short of the initial projections by the government, which plans an incentive outlay of Rs 6,238 crore (for ACs and LEDs) between 2021-22 and 2028-29. But industry veterans like Jawa and B. Thiagarajan, MD of Blue Star India, say the scheme could still prove to be crucial for India’s emergence in the global AC manufacturing landscape that is dominated by China. Pumping out 100 million ACs a year, Chinese manufacturers are cooling homes across leading markets from the US and India to the harsh sub-Saharan Africa. As per the argument that persuaded the authorities to change their stance towards the sector, India’s AC manufacturing capacity would go up to 40 million a year over the next decade from 4 million in 2022. That would mean 16 million ACs available for export, after taking care of projected local demand of 24 million a year by 2032.
As stainless and alloy steels are low-volume but high value-added items, the threshold investment levels in PLI 2.0 need to be significantly lower as compared to PLI 1.0
Journey of hope
Meanwhile, the good part is, there has been progress, howsoever little. After doubling the value of mobile handset exports in FY22 to Rs 45,000 crore over FY21, India is estimated to have exported Rs 90,000 crore worth of mobile handsets in FY23. Gandhi from CRISIL says this proves the success of PLI at least to a certain extent. “Similarly, in the pharma industry, India is now making 35 active pharmaceutical ingredients (APIs), which we used to import from countries like China. As a result, India’s imports have come down,” she says.
According to Ramesh Swaminathan, Executive Director, Global CFO and Head of Corporate Affairs at pharma major Lupin, while PLI is aimed at “fostering the growth of global champions from India” by boosting investment and production in the sector, it requires tweaking to succeed. “To further enhance the scheme, implementation of mandatory incremental sales of 7 per cent year-on-year needs to be applied specifically to the selected, approved products eligible for benefits. Such an approach would be more pragmatic and beneficial, allowing companies to focus their efforts and resources on specific products,” he says, adding that additional incentives would encourage research and innovation.
Like JSL’s Sharma, Chanakya Chaudhary, VP of Corporate Services at Tata Steel, is optimistic. “The PLI scheme would go a long way in realising the National Steel Policy 2017 both in terms of scale and quality of products needed for consumers,” he said in a statement. “PLI is aimed at encouraging domestic as well as foreign companies to manufacture specialty steels needed for high-end applications.”
“Focussed on AC component manufacturing, the PLI would alter the order of the game, where today Indian manufacturers lag behind their Chinese competitors. While 75 per cent of the value of items used in ACs are now being imported, only 25 per cent would be imported by end of the period,” says Jawa from Daikin, which is setting up a plant at Sri City for Rs 850 crore.
According to Athar, between 2020 and 2022, the government has at least managed to streamline the processes for each PLI, the application process for the respective sectors, incentive payout mechanisms, and by setting up bodies for scrutiny of progress under PLI. “Since it is a fairly large scheme that involves seamless coordination across multiple ministries and departments, it took a lot of effort between announcements and their actual launch for respective sectors. Further, the government has secured investment commitments from some 450 companies across sectors.” And now with the house in order, Athar expects significant bump in investments and production over the next few years.
With the scheme covering 14 sectors—well over 60 per cent of India’s manufacturing GDP—stakeholders and experts are now placing their bets on efficient implementation of PLI over the next couple of years, with significant increase in production and incentive disbursement being crucial from 2023-24. Gandhi points out that some Rs 30,000 crore or 11 per cent of the projected capex under PLI has already been invested by private players. In the three years till 2026-27 from now, as per CRISIL MI&A’s analysis, 66 per cent or over Rs 1.81 lakh crore of investments are due. If they materialise, India would be well on its way to becoming a manufacturing and exports powerhouse.