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PLI Scheme: New Challenge To Make In India, But Few Takers; Lesson From Vietnam Warranted – Analysis

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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.

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Subrata Majumder

Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review .

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