PLI Scheme: New Challenge To Make In India, But Few Takers; Lesson From Vietnam Warranted – Analysis
Make in India lost steam. Prime Minister Narendra Modi escaped success stories from the rampart of Red Fort in Independence Speech in 2019. Several attempts were made to rejuvenate Make in India , invoking major reforms like reduction in corporate taxes, land reforms at state level and downsizing cumbersome procedures by encompassing major labour laws . But, they all failed to unleash a positive impact on manufacturing growth.
PLI (Production Linked Incentive) is a new challenge to give a new lease of life to Make in India. It overrides Make in India by doling out direct incentive through sales. Hitherto, reforms were made to push Make in India through stepping up Ease of Doing business, reduction in corporate taxes, adopting digitization and others , which connote indirect measures.
Damaged by unprecedented COVID 19 pandemic, global manufacturing witnessed dramatic changes . GVC (global value chain) , which accounts for 70 percent of international trade and investment, is in retreat and protectionism is on the rise . USA – the global hub for consumption – headed for protectionism under the Trump philosophy of America First policy and China – the global hub for GVC manufacturing – is losing steam with foreign stake holders shifting to other low cost manufacturing areas in South East Asia.
India decided to transform its manufacturing , following the new trajectory of growth in the world. The Economic Survey 2019-20 underpinned the necessity for transformation in manufacturing. It advocated the country to be global hub for assembly operation and value chain manufacturing. To this end, focus on PLI and encourage MSMEs to play greater role, have been the main mantras to rejuvenate the manufacturing.
India has the advantages of becoming a potential platform for value chain manufacturing. It owes cheap and abundant labour. This was advocated by Professor Arvind Panagariah, saying “ India is abundant in labour and assembly of products. It must specialize in these activities across a large number of products.”
To this end, India doled out a mega fiscal incentive to MSMEs in last May. But, it failed to rejuvenate the manufacturing. Domestic investment plunged . It nosedived by over 42 percent in 2020-21 , from the growth of 19 percent in 2019-20, according to CMIE. This manifest that fiscal incentive was not propitious for the challenges to recover from the pandemic.
PLI is the second major attempt to boost manufacturing. But, this too lost much attraction, the analysts observed. There were few takers of the scheme. Generally, every scheme is launched with fanfare, but they peter out soon, observers noted. Lack of transparency , red tape and cumbersome procedures bar practical application of the policy. Lack of fundamental reforms in bureaucracy is the major drag on implementation of the schemes. In India, bureaucracy pivots on Rule Base, adopted in 1986. In Japan , bureaucracy is the guardian of people interests. PLI scheme is feared to fall prey to this rule base bureaucracy.
The current PLI scheme is not new. The origin of the scheme is traced back to Phased Manufacturing Programme (PMP) in electronics in 2015-16. The National Policy in Electronics , launched in 2019, embodied three schemes for electronics. One of them is Production Linked Incentive Scheme (PLI). Others were Scheme for Manufacturing Electronics Components and Semi –Conductors ( SPECS) and Modified Electronic Manufacturing Clusters Scheme ( EMC 2.0). The new PLI is an extended scheme to boost manufacturing in various sectors , covering 13 industries.
Official sources claimed that electronic industry made a rapid growth since past 3-4 years. One of the factors attributed to this growth was PLI scheme. Production of electronic goods reached Rs 4,97,484 crore in 2020-21 from 4,58,006 crore in 2018-19. India’s share in global electronic manufacturing increased to 3.6 percent in 2019 from 1.3 percent in 2012. This place the country a potential harbor for digital economy.
Nonetheless, this trajectory of growth in electronic manufacturing does not reflect the impact of PLI , critics argued The reality is different . Surge in the growth of electronic industry was mainly due to mobile phone production, while other areas of electronics witnessed adverse growth. The growth in mobile manufacturing was triggered by Chinese manufacturers, which made foray in the country. Chinese manufacturers made debut, with Modiji’s laying red carpet to encourage FDI irrespective of political face off. The main attraction of Chinese firms investment was the demographic advantage of India and the rising protectionism through high tariff. Against these backdrops, eyebrows were raised over the success of PLI, claimed by government.
Another major concern of PLI scheme, which arrested the manufacturers, is WTO backlash under ASCV ( Agreement on Subsidy and Countervailing Duty) . PLI scheme mandates localization in mobile phone and some IT hardware manufactures, such as laptops, PCs starting , from the second year . WTO prohibits discrimination in localization between indigenous and imported products . To this end , some big manufacturers distanced from the scheme, as the WTO backlash can not be ruled out.
It brings us to have a lesson from Vietnam. Vietnam is an emerging nation in the global map for manufacturing .Vietnam has became the second biggest destination for imports of electronic and telecommunication items after China. Supporting Industry has been the backbone for the growth of manufacturing industry in Vietnam. Supporting industry involves materials, accessories, components and spare parts used for assembling finished products. According to a survey, the localization in Japanese investing firms in Vietnam is as high as 34 -35 percent and is making a rapid growth after the Japanese firms shifted to Vietnam during the COVID 19 pandemic.
