China Sees PLI Scheme as a Threat. The Govt should Step on the Gas

The Production-Linked Incentive (PLI) scheme — launched in March 2020 to make the manufacturing sector globally competitive — is an important step towards fulfilling the government's vision of Atmanirbhar Bharat. It aims to remove sectoral disabilities, create economies of scale and ensure efficiencies. Much has been written about the scheme and how it will change the way the manufacturing sector works in the country. Does it really have what it takes to attract global investment, generate large-scale employment and enhance export?

To try and answer this question, ETRise Top MSMEs Conversation spoke to A Sakthivel, President, Federation of Indian Export Organisations (FIEO); Nitin Kunkolienkar, President, Manufacturers' Association of Information Technology (MAIT); Amrit Manwani, Managing Director, Sahasra Electronics, and Kunal Chaudhary, partner, EY.

Edited excerpts:

Understanding the Scheme

The government had launched many schemes, some of which have been challenged by the World Trade Organization as they were only export oriented, said Chaudhary. All the schemes were primarily dependent on how much was being invested — this was different from what other countries were doing. This time around, the government wanted a shift in mindset. It wanted an output-linked scheme because it wanted companies to perform and then get incentives. It wanted to disperse incentives in an automated way. “The thought process showed that the government wanted to give incentives to companies or entrepreneurs who are successful. The government also felt that they needed to create champions, or anchor companies, who will then set off a ripple effect that will help other companies to grow,” said Chaudhary.

Watch the entire ETRise Conversation on, “Can PLI scheme boost Make-in-India capacity of MSME?”

The PLI scheme started with mobile phone manufacturing before expanding to other sectors, including IT. This sector has done well during the pandemic as everyone was working from home and there was demand for laptops and other IT products. The global order is changing, people are looking at a China Plus One strategy. India is showing a lot of potential under these circumstances.

"This is the right time for the government to come out with this scheme as global players are also looking at recreating a supply chain. One of the significant differences between this and the previous schemes is that the government has mandated that they're not going to go ahead with import-substitution models this time. Instead, they are looking at export-led growth. PLI has created a scope for volumes or scale, which never existed earlier. This has created a huge opportunity for exports to grow. For this kind of scale, you need local value-add. So, you need to create a supply chain in India,” said Kunkolienkar.

China is coming out against India. The prices of components are going up, which means China is anticipating a threat from this policy and so is trying to hold back supplies to India, said the president of MAIT. The Indian government should come out more forcefully on this policy. The biggest beneficiary of this scheme will be the government as its revenues will grow manifold and GST collection will go up. Other revenue streams will also become visible soon.

The apparel and textile sector took a huge beating during the first two waves of Covid, but things are now looking up. Orders are picking up over the last two months as the European and American markets open up. The sector hopes to do better this year, said Sakthivel of FIEO. There is a positive sentiment towards India.

Malwani said some more issues need to be sorted out. “We have major disabilities. The financial costs are higher in India than in our competitors such as Taiwan, Korea, Singapore, Thailand, Vietnam and China. This scheme will help us overcome that. The logistics costs in India are far higher than in these countries because they have an ecosystem of supply chain, and they have a very robust infrastructure. We lag on both accounts. With this scheme, we will be able to do far better with the electronic component sector,” said Malwani.

Being globally competitive

When the PLI scheme was introduced, it was with the thought of creating champions in industry, of attracting MNCs to come and set up shop in India for exporting. This will benefit the MSME sector and the component sector. Not only will they get a better scale, but working with these companies will also teach them how to become more competitive. “MNCs and large companies are trying to get into electronics. The best example is Tata’s plan to make a large investment in this sector. Such companies will give enough demand support to MSMEs and with that, we will be able to produce stuff that are competitive not only for the Indian market, but also for the global market,” said Manwani.

Kunkolienkar had a different view on this subject. He said while this would benefit the MSME sector and a lot of multinationals were willing to relocate their supply chains to India, the biggest challenge here was the logistics costs. “Today, India does not have any international transshipment point. By developing one, we can address the African market, Middle Eastern markets and the European markets in a much better and faster way when compared to China from a geographical perspective. Port economics is better in China. India's best ports are equal to the most average ports in China. We need to upgrade our ports and air connectivity. The cargo handling capacity has to go up. India has to come with its own international transshipment point. There has to be a structured, economic agenda beyond the PLI. Sagarmala is coming up in a big way but that's internal connectivity. We need to tie up with ports like Salalah or Jebel Ali, or create something in Tanzania,” he added.

India also needs drastic reforms in ease of doing business. Sustenance is the key. Once you start a business, you should be able to focus on it hassle free, said the MAIT chief. The faceless assessment at ports is an excellent step but the factual aspects are very worrying. The assessment is being done by people who don’t understand the product lines and keep raising queries, creating unnecessary hassles. This needs to be reviewed, he added.

Today, 80% of manufacturing happens in Punjab, Haryana, Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra. Most of these states are not aligned with the central government’s policies. States need to take their policies ahead and not get involved in petty politics, the experts said.

Benefits of the PLI scheme

1. This scheme is helping the IT sector. For the first time, multinationals and global companies are showing interest in manufacturing in India.

2. There will be a demand aggregation in electronics. There is no need to get all components from India. One can start with casting, molding and sheet metal. Earlier, these came as a part of a kit and people would assemble in India which continued till 2015 but now, we can set up one of the world's best molding industries with the latest amenities and get the best skills.

3. This scheme was introduced during the pandemic when things came to a standstill everywhere. Many supply chains were affected, and they are now looking at relocating out of China. India never offered any competitive regime. There were no central incentives to attract business. Now state governments are coming up with their own plans. If these are packaged together, there is a greater opportunity.

4. As the industry scales up, components will become cheaper. This will help spread the manufacturing base within India and create multiple supply chains. For example, Noida is one supply chain for mobile, but Chennai is an emerging one. This will also balance employment and growth.

5. India will emerge as a design-led hub. Some top companies are trying to come out with an electronic hardware startup ecosystem.

6. India wants to develop Man Made Fiber garments because we have reached the saturation point for cotton garments. We import the fabric and manufacture garments. To produce the fabric, we need investment.

7. The government has agreed to extend this scheme to the textile segment. This will bring more investment.

8. The main aim of helping the mobile phone segment was to boost exports and, in some cases, for national security. For textiles, it was to boost exports and to generate employment.