The time for PLI 2.0 is now: Budget 2023-24 needs to deliver if India is to become the factory of the world
- The Production-Linked Incentive (
PLI) scheme announced by the government of Indiain March 2020, started with three manufacturing sectors. Today it has 15 (including one proposed) under its fold.
- The scheme has sparked investment commitments of ₹3.5-4 lakh crore, which would account for 16% of the total expected industrial capex between fiscals 2023 and 2027.
- About 67% of PLI (Production-Linked Incentive) investments are in new-age sectors and 70% are green.
AdvertisementWhen India set a target of becoming a $5 trillion economy by 2025, it triggered intense introspection on what could be the drivers of this growth.
Unlike many of its Asian counterparts through the 2000s, India’s growth has been services-led.
Deeming that it’s time for manufacturing — languishing at below 15% in terms of contribution to gross domestic product (GDP) — to step up as a propeller of growth, the government unleashed a plethora of schemes.
‘Make in India’ in 2014 focussed on 25 key sectors and four pillars — new infrastructure, processes, sectors, and mindset.
While more schemes ensued, none perhaps resonated as widely across stakeholders, as the Production-Linked Incentive (PLI) scheme announced in March 2020, starting with three manufacturing sectors.
The scheme has expanded since, bringing 15 (including one proposed) under its fold. CRISIL MI&A Research estimates that ~₹1.93 lakh crore of incentives in all are up for the taking, that will help vastly scale up and position India as a global manufacturing hub in the next five years.
The scheme has sparked further investment commitments of ₹3.5-4 lakh crore, which would account for 16% of the total expected industrial capex between fiscals 2023 and 2027.
So what makes the PLI attractive?
For one, it comes against the backdrop of a broader deglobalisation trend worldwide. The pandemic suddenly foregrounded the need to reduce import dependence and secure supply chains.
Two, shifting bilateral ties and geopolitical axes have added to the mix of opportunities available to India, to rise as a reliable manufacturing partner globally.
AdvertisementAbout 67% of PLI investments are in new-age sectors and 70% are green.
Nonetheless, a key question remains: will Indian industries become self-sustaining and globally competitive in the given, short time frame?
There are plenty of reasons to think this might not happen to the desired extent, at the current level of incentives.
India’s stage of manufacturing
First, India is at a far-less mature stage of manufacturing vis-à-vis giants such as
AdvertisementSecond, domestic manufacturing costs are way higher than peers. Of the 15 PLI sectors, 12 are power intensive. About 10 also have logistics as an important cost variable. And India falls woefully short on both these counts.
Power reforms notwithstanding, industrial tariffs at ₹9-11 per unit is almost double than China. It will take years before our logistics costs (currently at 14% of GDP) match those in peer countries. Further, scale and costs are related.
Solar module manufacturing is a case in point.
Domestic modules are currently 30-35% costlier compared with Chinese counterparts (pre-tax).
China currently accounts for 77% of global solar module capacity, with ~300 GW. Even after its targeted expansion to 65-70 GW by 2027, India will still be miniscule, making up merely ~6% of global capacity.
AdvertisementLongi Solar, one of China’s leading photovoltaic (PV) players, has set up module manufacturing capacity of 80-85 GW by end-2022 — higher than what India as a whole would have by 2027.
Further, Longi Solar have over 22 production facilities spread across wafer, cells and modules, with just one plant in Yunan having 15 GW module manufacturing capacity.
This is ~4.3 times the size of the largest module player’s capacity in India. Scale benefits in terms of labour productivity, power discounts and logistics incentives are thus very high for Chinese companies.
The situation is no different in sectors such as semi-conductors or batteries.
So while PLI 1.0 has been a step in the right direction, the time to think bigger — is now.
AdvertisementA PLI 2.0 starting this
Moreover, with climate change closing in, more new-age sectors (electrolysers, green hydrogen, green ammonia, grid storage, and transmission equipment) will need incentives to address those concerns and make value chains competitive.
Such incentives and support would be needed at least for a decade before India can establish itself as a strong global contender both, in terms of scale and pricing.
(Hetal Gandhi is Director- Research,
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