PLI Is Working. Here Are Ways To Get More Out Of It

By August 2024, the PLI initiative has already delivered notable results: Rs 1.46 lakh crore in investments, Rs 12.50 lakh crore in incremental production, 9.5 lakh new jobs and exports exceeding Rs 4 lakh crore. Key sectors like electronics, pharmaceuticals and food processing have made significant strides. In FY 2022-23 and 2023-24, the government allocated Rs 2,968 crore and Rs 6,753 crore in incentives across eight or nine sectors, respectively, with a total outlay of Rs 1.97 lakh crore across 14 sectors.

While the scheme has spurred innovation and growth in the short term, challenges remain that must be addressed for sustained success and long-term competitiveness.

At its core, the PLI scheme aims to fuel India’s growth by offering financial incentives tied to production milestones for companies investing in key sectors, which are designed to reduce reliance on imports, boost exports and foster self-sufficiency, while creating millions of jobs.

The Impact So Far

Surge in foreign investments: PLI schemes are already drawing substantial investments. For instance, the cellphone sector has attracted global giants like Foxconn and Wistron, with over Rs 11,000 crore in investment proposals expected to generate Rs 1.2 lakh crore in production over the next five years. Figure 1 below gives some perspective.

India’s FDI also soared, with cumulative FDI reaching US$ 1.03 trillion from 2000-2024, supported by business-friendly reforms. In just Q2 2024, FDI inflows hit US$ 19.8 billion. However, despite the impressive figures, 2024 saw FDI equity inflows drop 3.5 per cent YoY, indicating the need for continued foreign investments to fuel long-term growth and address challenges like the current account deficit.

Powering domestic manufacturing and job creation: The PLI schemes for electronics and textiles are set to revolutionise job creation, with the semiconductor and mobile manufacturing sectors alone projected to generate 1 million jobs by 2026. The automotive sector, driven by the shift to electric vehicles (EVs), is also poised to create a wave of employment opportunities and upskilling programmes.

India’s EV sector is benefiting from two massive PLI schemes — Rs 25,938 crore for automotive and Rs 18,100 crore for advanced chemistry cells (ACC). These incentives offer up to 13-15 per cent on annual sales of locally produced EVs, attracting major investments from Tata Chemicals, Amara Raja Batteries and Exide Industries. Even global players like LG Chem and Samsung are keen to tap into this booming market, positioning India as a future leader in lithium-ion battery manufacturing.

However, the fine print leaves smaller players on the sidelines, with high entry barriers like Rs 10,000 crore in global revenue and Rs 3,000 crore in fixed asset investments for automakers. Additionally, GST discrepancies — like the 18 per cent tax on EV charging services and replacement batteries — pose a challenge. Given that batteries make up 20-30 per cent of an EV's cost, a comprehensive GST overhaul is crucial to making EVs more affordable.

Diversification of Supply Chains

The PLI scheme is driving a shift in global supply chains, with companies moving production to India to reduce risks. This transition is helping decrease India’s dependency on China, particularly in sectors like electronics, medical devices, and pharmaceuticals.

As shown in Figure 2, the PLI has fueled a 274 per cent increase in investments versus exports, boosting India's export potential. By focusing on 14 key sectors, the scheme is transforming the manufacturing landscape, driving domestic industry growth, enhancing global competitiveness and creating millions of jobs, all contributing to India’s economic goals.

Challenges to Address

Unmet Targets and Slow Progress: Despite early wins, the PLI schemes face hurdles, with six critical sectors — steel, textiles, batteries, white goods, automotive, and solar panels — seeing no participation. Meanwhile, only 1 per cent of the total outlay is allocated to eight other sectors. Figure 3 below sheds some light on the scenario.

By September 2024, telecom PLI beneficiaries had invested Rs 3,925 crore and created 24,980 jobs, but progress remains slow in meeting the 44,000-job target. Although India has achieved 60 per cent import substitution in telecom products and is nearly self-reliant in 4G/5G, exports are lagging, especially with key markets like Kenya and Egypt demanding quicker results.

Slow disbursement of funds: Many companies report delays in receiving the incentives promised under the PLI schemes. The government had disbursed nearly Rs 10,000 crore until last financial year, but this year’s payout is under Rs 1,000 crore, with most claims coming from electronics manufacturers.

Despite a 33 per cent increase in PLI allocation for FY25 to Rs 6,200 crore, the heavy compliance burden as a key reason for the reluctance to claim incentives. In one case, Samsung faced delays in receiving Rs 500 crore for FY21 due to discrepancies in its documents, only receiving payment after revising its claims.

Inadequate interventions: To fully leverage PLI incentives, India must address critical infrastructure gaps, especially in industrial parks, transport and technology platforms. While some states are progressing, rural and semi-urban areas still face bottlenecks.

Sectors like textiles are struggling with competition and strict norms. Solar manufacturing is hindered by limited cell capacity. Despite reaching 77 GW in the manufacture of solar modules, India’s capacity for manufacturing solar cells — the central component of a solar module — lags behind at 7.6 GW, causing supply shortages and delayed projects.

The auto sector faces rising costs, the shift to EVs and setup delays, while the ACC sector is stalled due to lengthy commissioning and high investment requirements. Despite increased funding, IT hardware lags behind mobile manufacturing. India’s PLI success hinges on addressing these infrastructure and sector-specific obstacles.

Global competition: Other countries, particularly Vietnam, Indonesia and Malaysia, are ramping up their efforts to attract global manufacturers, with their own incentives for manufacturers (see figures 4 and 5).

India’s ambition to become Asia’s manufacturing leader hinges on overcoming key obstacles, especially in comparison to Vietnam. The country faces two pressing challenges: High import taxes and inefficient supply chains.

With a 10 per cent import tax on tech goods and lagging infrastructure development, India’s competitiveness remains low, even after companies like Apple are ramping up investments. In comparison, Vietnam holds an edge with lower import duties, a streamlined manufacturing environment and established trade ties with China.

India must tackle its supply chain inefficiencies, outdated infrastructure and the complex regulatory maze that varies across states. Despite attracting companies seeking alternatives to China, its reliance on Chinese imports and persistent logistical delays stifles its potential. Without reforms in taxation, higher efficiency and a simplified business climate, India risks being left behind in the race for global manufacturing dominance.

Key Policy Reforms Needed In PLI

Below are policy recommendations to help overcome existing obstacles and improve India’s manufacturing ecosystem.

Resource dependence and trade agreements

Join strategic trade partnerships: India should prioritise joining key global trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). This will secure more reliable access to raw materials and minerals needed for advanced industries like semiconductors and smartphones.

Bilateral agreements for raw materials: In the short-term, India should negotiate bilateral agreements with resource-rich countries to guarantee a stable supply of critical minerals. These agreements can reduce exposure to price volatility and supply chain disruptions.

Domestic resource development: To reduce dependence on imports, India should invest in the exploration, extraction and refining of critical raw materials domestically. This would require partnerships between government, private companies and international players to develop mining, refining and recycling infrastructure.

Strengthening supply chain and infrastructure

Modernise infrastructure: A significant portion of India's supply chain bottlenecks are due to outdated infrastructure. The government should prioritise upgrading the national transportation network, including roads, railways and ports. Additionally, logistics hubs should be developed to streamline the movement of goods.

Invest in power reliability: The industrial sector is often plagued by frequent power outages. Investment in reliable, decentralised power grids, especially from renewable energy sources, would ensure consistent power supply to manufacturing hubs and boost production efficiency.

Smart infrastructure in rural areas: To decentralise manufacturing, the government should foster the development of specialised industrial zones in underdeveloped rural and semi-urban areas, reducing regional inequality and making manufacturing more resilient.

Develop semiconductor manufacturing capabilities

Dedicated semiconductor clusters: India must focus on establishing semiconductor manufacturing clusters equipped with critical resources such as water, energy and high-end machinery. These clusters should offer attractive incentives and infrastructure to encourage global firms to invest in India.

Collaborations with global leaders: Collaboration with established global semiconductor players should be encouraged, offering tax incentives, land acquisition benefits and joint ventures in return.

Focus on R&D and skill development: Significant investment in R&D for semiconductor fabrication technologies should be made, along with training and skill development initiatives in advanced manufacturing to create a skilled workforce.

Regulatory and labour reforms

Create stable labour policies: India needs clearer, more consistent labour laws that balance worker rights with industrial growth. This would involve dialogue between the government, trade unions and industry stakeholders to align production goals with labour protections. Labour reforms should emphasise fair wages, workplace safety and dispute resolution mechanisms.

Strengthen environmental regulations: As environmental concerns are increasingly critical for investors, India should ensure that regulations are robust and align with global standards. The government should introduce policies that promote sustainable practices, and provide financial incentives to companies that adopt green technologies and low-carbon manufacturing processes. 

Support for high-tech infrastructure

Invest in specialised zones: India should focus on creating specialised industrial zones for sectors like electronics, semiconductors and renewable energy components. These zones should be equipped with cutting-edge infrastructure, including high-speed internet, advanced machinery and skilled labour.

Public-Private Partnerships (PPPs): Encourage public-private partnerships in building these zones to ensure that government incentives align with private sector investment. These partnerships can also improve access to capital, technology and international networks.

Roadmap To Global Competitiveness

India’s manufacturing aspirations are at a crucial juncture, and while PLI schemes have the potential to transform the sector, their success hinges on addressing critical bottlenecks. By improving infrastructure, speeding up incentive disbursements, aligning skill development with industry needs, and expanding the scope of PLI, India can position itself as a global manufacturing leader.

However, these reforms must be accompanied by consistency in policies and the simplification of regulatory frameworks to attract both domestic and foreign investments. To unlock India's full manufacturing potential, bold reforms and a seamless policy environment are essential — only then can the PLI schemes truly propel India to the forefront of global manufacturing.

(The writer is a public policy and urban transportation enthusiast and specialist. Views are personal)