Jagannath International Management School Kalkaji
The manufacturing sector has played a critical differentiating feature between emerging market economies. The scale, growth rate, and contribution of the manufacturing sector to the gross domestic product of the country are yardstick parameters of economic performance and export competitiveness. The country’s manufacturing sector’s output efficiency depends on input cost. Labour and capital efficiency and technology as a facilitator help to reduce operational costs for manufacturing firms. In the present world of shrinking geographical boundaries, it is essential for India to strengthen its manufacturing base to contribute to the global value chain and world trade. The economic ecosystem of the country is governed by resilient macroeconomic fundamentals of the country based on the foundation of structural sustainable fiscal reforms and accommodative monetary policy measures.
Over the years India’s Manufacturing sector has significantly contributed to the economic growth of the country with an increase in investments by foreign organizations in the domestic marketplace and has created a competitive environment, as well as overcome the drawbacks of domestic monopolies. A healthy competitive environment helps firms to enhance their processes and product offerings, thereby fostering innovation and leading to the economic growth of the country. The strengthening of small and medium enterprises and the transition in the digital landscape in India have reduced the logistic cost of manufacturing firms. To boost manufacturing growth in India it is essential to incentivize manufacturing firms’ operational efficiency and through structural reforms to reduce their average cost of production. Subsidies on production cost help firms to reduce their cost but production-driven incentive scheme can generate higher profits for the firms and reduce the fiscal burden of the government of India.
The Government of India’s vision is to make India self-reliant, by enhancing manufacturing capabilities and exports with an announcement of Production-linked incentive (PLI) schemes for 13 key sectors such as (i) Mobile Manufacturing and Specified Electronic Components; (ii) critical key starting Materials/Drug Intermediaries & active Pharmaceutical Ingredients; (iii) manufacturing of Medical Devices; (iv) Automobiles and Auto Components; (v) Pharmaceuticals Drugs; (vi) Specialty Steel; (vii) Telecom & Networking Products; (viii) Electronic/Technology Products; (ix) White Goods (ACs and LEDs); (x) Food Products; (xi) Textile Products: MMF segment and technical textiles; (xii) High-efficiency solar PV modules; and (xiii) Advanced Chemistry Cell (ACC) Battery for a period of five years starting from fiscal year (FY) 2021-2022. Source: https://www.pib.gov.in/PressRelease
The Production Linked Incentive Scheme will be providing incentives for domestic manufacturing and sales thereby giving a fillip to investment from within and outside India. It will help to reduce India’s reliance on imports from other countries. The introduction of non-tariff measures will help to compete more effectively with cheap imports and would help in generating job opportunities. It will also help to invite foreign companies to establish their units in India and improve the cost competitiveness of domestically manufactured goods. It will also help in the adoption of innovative technology and blend domestic and export sales to make manufacturing competitive and sustainable.
The PLI Scheme has the potential to boost research and development, economies of scale, meet quality standards, and create global champions. The PLI scheme might give large industry houses this impetus to commit to output targets in exchange for sales incentives. In the case of foreign enterprises, manufacturing in India can help them become more cost competitive. Domestic enterprises can take the risk of investing more in Research & Development and new technologies to meet their goals.
The government of India must ensure that the scheme remains WTO compliant, and the quantum of the subsidy should not be linked either to the value of exports or domestic content. The Government has to establish a committee with experts in different fields. Also, the monitoring should be limited to oversight, and no day-to-day monitoring should be done. Moreover, Infrastructure should be expanded in tandem with reforms. The government will have to find a balance between excessive supervision and oversight to create a healthy competitive atmosphere to make this happen.
The PLI scheme must be instrumental in accelerating domestic manufacturing capabilities, reducing sector disabilities, and simultaneously enabling India to play a bigger role in the global supply chain. The budget allocation and incentive structure of the PLI Scheme is skewed towards benefiting the products and achieving import substitution, however, not necessarily export promotion. Balancing the budget allocation will be instrumental in fostering export promotion for increased global trade participation across the supply chain.
