The Make in India policy of 2014 was the last of many attempts since 1991 to make India the centre of the global manufacturing supply chain. The government has now put that attempt right with the introduction of the Production Linked Incentive scheme of July 2020 (PLI), which has since seen many industries added to it.
Previous worldwide attempts to woo manufacturers were based on promises that did not acknowledge the realities of setting up industries. While many global manufacturers and brands have successfully set up in India since the 1980s, overseas mid-size and small investors and businesses have been reluctant to establish themselves because of bureaucratic obstacles, and concerns over land acquisitions, labour issues and delays in obtaining approvals.
The government introduced the PLI to attract overseas, as well as domestic companies to start manufacturing in 13 sectors. These include mobile phones, pharmaceutical products, automobiles, specialty steels, textiles, photovoltaic panels and advanced chemistry cell batteries. It is intended to give a collective push to employment creation, exports and the closer integration of India with the global supply chain. The covid-19 pandemic exposed the vulnerability of the economy to global shocks and acted as a catalyst to establish the PLI.
The PLI is valid for five years, ending in 2026-27. The minimum capital outlay is US$14 million with an exception for Indian micro, small and medium enterprises, for which US$1.4 million is the entry level investment. Applications are to be made through local companies and Indian subsidiaries of foreign companies. Such applications will be processed by a committee including the CEO of Niti Aayog (the National Institution for Transforming India, a government think tank) and the secretaries of departments such as Commerce, Expenditure, Revenue, the Promotion of Industry and Internal Trade, and the Ministry of Electronics and Information Technology and the Directorate General of Foreign Trade. Approval should take less than 30 days in most cases.
Clarity and simplicity distinguish the PLI from previous policies. An express promise of time-bound clearance is a cornerstone, as well as a simple framework of incentive payouts based on sales targets. It is a clear invitation to global leaders to move production to India. It is sensible for those producers who have existing sales to match the minimum parameters of the PLI. As the incentives are sales based, any producer with a clear business plan to shift all or part of their production to India can take advantage of this scheme.
Rough calculations show that with a minimum investment of US$14 million, and cumulative sales of about US$225 million over five years, US$12 million will be available from the PLI. There is the additional benefit of lower labour costs and a taxation rate of 15%. In a comprehensive comparative analysis with a developed country, manufacturing now has a US$25-30 million advantage over a five-year period. With a US$140 million investment the benefits could increase to US$250-300 million. There will also be the invaluable duty-free access to the rapidly growing domestic market. The scheme allows manufacturers to include research and development costs and the costs of transfer of technology in the minimum threshold investment figures, and gives permission to import older machinery with a remaining life of more than five years. These concessions make the real investment threshold even lower.
The PLI is a welcome initiative as it aims to place India firmly within the global supply chain. It is likely to improve foreign direct investment, leading to a stronger currency, to encourage localisation and new manufacturing clusters as supporting companies follow manufacturers into India, and to generate employment. Advances in technology and innovation would also result naturally.
No scheme is perfect until it is implemented, and industries will look to the government to improve such areas as land acquisition procedures, labour laws and infrastructure so that they meet the challenges of the rapid development needs of the economy. India is again on a cusp of history, and it is an exciting time for the Indian and world economies despite the crises they both currently face. It is to be hoped that the potential of India materialises as we all expect.
Gautam Khurana is the managing partner at India Law Offices
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