Budget 2026: PLI schemes are fiscal fuel for Atmanirbhar Bharat

In the 2000s, the boom in the Indian economy was primarily attributed to the information technology sector and India was positioned as a service-driven economy dependent upon export of back-office support services. The country’s economic growth strategy has recently shifted gears to focus on domestic manufacturing under the ‘Make in India’ policy and developing resilient supply chains to attain self-reliance. At the core of this policy shift resides the evolution of government-sponsored incentive mechanisms, such as the Production Linked Incentive (PLI) schemes, fiscal and non-fiscal incentives, tax holidays for startups, and concessional tax regimes, designed to incentivise growth in key sectors. PLIs alone in the initial round of introduction in Budget 2021 amassed a generous allocation by the central government of ₹1.97 lakh crore (approx. $21.5 billion).

According to a press note issued by National Statistics Office, Ministry of Statistics and Programme Implementation on January 7, 2026, India’s real gross domestic product is projected to grow by 7.4% in fiscal 2025-26, accelerating from the 6.5% estimated for FY25. Such growth can be sustained through continuous inward flow of foreign direct investment and transfer of technical know-how to strengthen Indian manufacturing sector. PLI schemes and other fiscal and non-fiscal incentives act as a carrot for multinationals to grab their share in the pie of India’s manufacturing revolution.

PLI schemes represent a fundamental shift in philosophy of the Government by moving away from input-based subsidies towards outcome-oriented incentives that reward the actual production and value addition in India. By linking financial incentives directly with incremental sales and investment thresholds by the applicants, the Government has aligned the incentives with tangible economic outcomes, creating a performance driven framework that encourages efficiency and competitiveness.

The existing PLI schemes introduced by the central government in the past few years have been encouraging. Sectors such as electronics manufacturing, pharmaceuticals, and automotive components have witnessed increased investment commitments and capacity expansion. The semiconductor industry also received significant investments, and India got its first semiconductor manufacturing plant.

The coverage remains limited, and several manufacturing sub-sectors with significant growth potential continue to operate without the benefit of targeted incentive frameworks. Expanding the ambit of PLI schemes to encompass a wider array of industries including textiles, leather goods, furniture, and precision engineering would create a more comprehensive industrial policy capable of driving broad-based manufacturing growth.

Need for expansion of ambit of PLI

The first round of PLIs focussed on key sunrise sectors, however, the manufacturing industry is a complex web of interconnected industries, each with distinct characteristics, and challenges, yet complement each other. Therefore, a narrow focus on a select few sectors risk creating distortions and leaving substantial economic potential untapped. Hence, there is an expectation within the industry for the Government to foster balanced industrial development across multiple product categories.

Secondly, for any business to grow, especially for the sunrise sectors to flourish, there is a need for the development of an ecosystem. A strong ecosystem includes availability of high-quality inputs and resources, skilled labour and efficient supply chains. The Government should focus on introduction of incentives for the raw material suppliers and integrators, etc., skill-focussed trainings, etc., for the development of an entire ecosystem that would not only attract investment in the specific industry by the PLI applicant but also by its business affiliates.

With the introduction of incentives in both the aforementioned options, the Government would enable vertical as well as horizontal growth in the manufacturing sector.

Expansion of PLI coverage would enhance the nation’s resilience to external shocks and disruptions caused by recent global events that have underscored the vulnerabilities inherent in concentrated supply chains. A diversified manufacturing base, supported by appropriate incentives, would provide greater economic stability and reduce dependence on imports across a wider range of products.

Refining the PLI framework

In addition to the expansion of the scope of the PLI scheme, there is a need to refine existing incentive policies to enhance their effectiveness and accessibility.

Simplification of the application process is paramount. Complex application procedures, narrow product definitions, extensive documentation requirements, and approval timelines deter potential beneficiaries and dilute the impact of incentive schemes. Streamlining processes through digital platforms, enhancing the scope of the product portfolio and reducing compliance burdens would increase the number of applicants.

Stability and predictability are equally important. Manufacturers make investment decisions with long time horizons, and tax uncertainty undermines confidence. The requirement to demonstrate profits from the first year of operations, coupled with the frequent disallowance of payments for technical know-how and support services, compels multinational enterprise groups to undertake rigorous cost-benefit analyses at each stage of investment. To unlock India’s potential as an investment destination, it is essential that the Government rationalise the domestic tax and regulatory environment, thereby shedding its image as a tax-aggressive jurisdiction and fostering global partnerships that encourage growth and innovation.

The treatment of incentives under tax and transfer pricing regulations also warrants careful consideration. Clear guidance on these matters would provide certainty for applicants and the tax administration alike, reducing the scope for disputes and ensuring that incentive schemes achieve their intended objectives without creating unintended tax controversies.

India is poised for continued growth, with its strategic pivot towards domestic manufacturing, innovation, and self-reliance providing a solid foundation. The government’s ongoing reforms, including the new Income Tax Act, 2025, and GST harmonisation, have made strides in modernising the tax framework. The government’s focus on key sectors through initiatives like PLI schemes, tax incentives, and capital expenditure will play a central role in driving the economy forward.

The upcoming Union Budget 2026 provides an opportunity for the Finance Minister to introduce relevant reforms in this space. Closing the aforesaid gaps require both a second-generation PLI scheme and a tax and transfer pricing rationalisation that allows real-world supply models to operate without friction, which is crucial for a technology-intensive manufacturing ecosystem to thrive.

(Malhotra is Head of Tax Practice, Shardul Amarchand Mangaldas & Co; Nagpal is Partner, Shardul Amarchand Mangaldas & Co. With inputs from Nitya Gupta, Senior Associate, Shardul Amarchand Mangaldas & Co; and Jaskaran Saluja, Associate, Shardul Amarchand Mangaldas & Co. Views are personal)