Recently, Finance Minister Nirmala Sitharaman specifically mentioned two subsidies granted to industry as it had asked for – (a) corporate tax cut in 2019 and (b) production-linked incentive (PLI) in 2020 – while seeking to know why it wasn't investing in manufacturing. The fate of the first is well-known but not so about the second.
The NITI Aayog, which is supposed to provide real time progress and monitor the PLI, hasn't done so. All it provides is the outlays for 14 sectors covered under the PLI, with a promise to provide a dashboard of information, in its annual report of 2021-22. Quite apparently, it seems to be a big mess.
What is PLI and what it aims to achieve?
PLI is a fiscal subsidy to push 'AatmaNirbhar Bharat' project with the goal of making domestic manufacturing "globally competitive" and "global champions". The subsidy is offered on (i) additional investments (ii) incremental sales and (iii) value additions.
It was first announced in March 2020, starting with mobile manufacturing and IT hardware, including "assembly, testing, marking and packaging (ATMP) units". Two more sectors were added later: critical key starting materials/drug intermediaries and active pharmaceutical ingredients and manufacturing medical devices. In November 2020, 10 more sectors were added: electronic/technology products, pharmaceutical drugs, telecom, food products, white goods, solar PV modules, automobiles and components, battery, textile and speciality steel. The 2021 budget announced allocation of ₹1.97 lakh crore for a period of 5 years, starting with FY22, for these 13 sectors.
In September 2021, drones and drone components (14th sector) was added, offering 20% subsidy on value additions – as against 1% to 6% for the earlier 13 sectors – for a period of three years with an allocation of ₹120 crore. It was claimed that this sector alone would create "10,000 direct jobs". In December 2021, additional 4% to 6% incentives were announced for semiconductor design, on net sales for 5 years. In August 2022, additional 1% incentive was granted for telecom and networking products to "build a strong ecosystem for 5G", with effective from April 1, 2022.
While the 2021 budget was silent on the PLI's potential to attract fresh investments, add value and create jobs, the 2022 budget made an announcement. In her budget speech, the minister said the PLI scheme had the potential "to create 60 lakh new jobs, and an additional production of ₹30 lakh crore during next 5 years" (from the first 14 sectors). The basis for this estimate was not revealed. Later, the NITI Aayog's annual report (2021-22) reproduced it without verification or supporting evidence or indicating the scheme's progress. The report also declared that the Aayog was "developing a PLI dashboard to monitor all PLI schemes".
There is no sign of the PLI dashboard yet and hence, little is known about the progress. There are official statements from time to time, disclosing details about companies, like list of drone manufacturers selected, those filed applications from the white goods sector or those selected for electronics manufacturing etc. But beyond such information, there is little concrete about the progress or achievements.
Lack of homework
True, the PLI is in its early days. But the problem is it was rolled out without homework.
In April this year, the empowered group of secretaries, set up to monitor the scheme, met for a review. At this meeting, the Department for Promotion of Industry and Internal Trade (DPIIT) is learnt to have flagged two key concerns: (i) no common parameters to understand value additions by companies under the scheme; different ministries do it for respective PLI schemes and (ii) no centralised database to determine various deliverables like the number of jobs created, rise in exports and quality improvement.
Following this, the Aayog, which is integral to the PLI's rollout, began looking at these concerns – which should have preceded the launch of the scheme or allocation of funds or approval of bidders. If the Aayog has made any progress in the five months, nothing is available in public domain.
In the meanwhile, several problems have cropped up in PLI's implementation.
For one, two sectors, IT hardware (laptop, PCs, tablets and servers) and telecommand network products, both launched in March 2020, are yet to take off. This is ascribed to many reasons, like inability of domestic manufacturers to meet qualifying requirements relating to investment, production, fixed asset and revenue; poor capability and demand for local products; indifference of foreign companies etc. As a result, the Centre is learnt to have gone back to the drawing board.
Former RBI governor Raghuram Rajan is not very enthusiastic about the PLI, although hesitant to dismiss it due to scanty data (no data on PLI-induced investment and jobs creations) or small time-frame. He recently wrote expressing two key concerns. One, whether (foreign) manufacturers would continue in India after the PLI ends, instead of shifting to better industrial climes of, say, Vietnam, or demand continuation of the PLI in perpetuity (domestic companies). Two, the PLI-induced production may not be globally cost-competitive, thereby hurting India's exports in other sectors, like PLI-inducted semiconductor sector would reduce cost-competitiveness of two-wheeler exports that rely on such chips.
The semiconductor sector is heavily subsidised.
For setting up a semiconductor and display fabrication unit (like Vedanta-Foxconn in Gujarat, for example), the Centre gives "50% incentives" of "project cost" and 50% of "capital expenditure" for setting up compound semiconductors/silicon photonics/sensors fabrication, semiconductor ATMP/OSAT facilities including discrete semiconductor fabrication. An allocation of ₹76,000 crore is earmarked for these. Further, the PLI allocates ₹1,53,392 crore for promoting electronics manufacturing with semiconductors as the foundational building block – consisting of (a) ₹55,392 crore for large scale electronics manufacturing, IT hardware, SPECS scheme and modified electronics manufacturing clusters (EMC 2.0) and (b) Rs 98,000 crore ($13 billion) for allied sectors comprising of ACC battery, auto components, telecom and networking products, solar PV modules and white goods. Then, there is a PLI of 4% to 6% on net sale of semiconductor design. The total subsidy comes to ₹2,30,000 crore.
The net subsidy to a semiconductor unit is, thus, more than 50% and hence, Rajan's concern. Rajan also expressed concern at India's continued reliance on "policy shortcuts" like PLI to boost manufacturing, as against long-term tasks, such as developing human capital, stable tariff and tax regimes, simple but fair land acquisition etc.
There are more areas to focus on too. For example, the US auto major Ford declared in May this year that it (i) wouldn't set up an EV unit in India for export, after being approved for PLI, and (ii) shut its two auto units in Chennai and Sanad. The reason is clear: lack of demand and bleak future for the auto sector's growth in India. What chance of the PLI succeeding in auto sector?
Several other multinational automakers have also departed India in recent times – General Motors, Man Trucks, Harley Davidson and United Motors. The five together have cost a loss of 64,000 jobs and dealer investments of ₹2,485 crore, says the Federation of Automobile Dealers Association (FADA). The annual reports of the Ministry of Corporate Affairs (MCA) shows "active" foreign registered companies fell from 80% in FY14 to 66% in FY21. A parliamentary panel report of 2021 expressed concern that manufacturing is shifting out of China but going to Vietnam, Taiwan, Thailand, etc., with a few coming to India. What was even more shocking was the panel's disclosure that it learnt all this from news reports, not from government officials who depose before it, reflecting the Centre's gross ineptitude. For the demand to rise, the income of people must rise and growth in the GDP must produce more jobs.
Tax cut and growth of manufacturing
As for the corporate tax cut of 2019 to boost manufacturing – at 22% for existing and 15% for new manufacturing units, new corporate tax rates are one of the lowest in the world – the RBI had said industry used it for debt servicing, building cash balances and other current assets, rather than renew the capex cycle. A parliamentary panel said, the tax cut led to a direct loss of ₹1.84 lakh crore in FY20 and FY21.
The lesson is simple.
Policy shortcuts, like tax cuts and PLIs, are not sufficient to take manufacturing share to 25% of the GDP, as the Centre wishes. There is no guarantee that these would work when a long list of subsidies (from 0% tax onwards) – tax holidays of SEZs, special tax rates, exemptions, deductions, rebates, deferrals and credits – have not. Budget documents of 2022-23, for example, say "total revenue foregone" to corporates on account of "major tax incentives" stood at ₹1.03 lakh crore in FY21 – 22.5% of the total corporate tax collection! Further, "effective tax rate" for manufacturing stood at 21.95% – which is less than that of non-manufacturing, at 22.54%.
Yet, what is manufacturing's contribution to the economy?
Manufacturing is stuck at 17-18% of the GDP for 16 years from FY07 to FY22. Its share of employment is worse and rapidly declining. The PLFS of 2020-21 showed, the manufacturing's share fell from 12.1% in 2017-18 to 10.9% in 2020-21. The Ashoka University-CMIE study of 2021 showed, the employment share of manufacturing halved (46%) in five years between FY17 and FY21.