Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development, and employment. Inclusive growth and issues arising from it.

Key Phrases: Import-Substituting Industrialisation, Non-Tariff Barriers, Global Value Chains, Manufacturing Sector Revitalization, Infant Industry Argument, Highly Fragmented Production Structure, Missing Middle, Liberalised Trade System

Context:

• India has witnessed an impressive export performance in 2021.
• It is believed that this exceptional export performance reflects the early impact of the PLI scheme.

Key Highlights:

• The government had introduced the Production-linked incentive (PLI) scheme to transform the capacity and capabilities of the manufacturing sector.
• The scheme focuses on 13 sectors with a total budget expenditure of ₹1,972.91 billion.
• The primary objective of the scheme is to mobilise local and foreign investments to increase the manufacturing capacity of domestic enterprises, hence allowing their integration with global value chains (GVCs).
• It is argued that the PLI scheme will be a game-changer for India’s manufacturing sector revitalization.

What are the issues with the Scheme?

• The scheme ignores the inherent and systemic issues with respect to its design, nature, and coverage that may have far-reaching effects on manufacturing, exports, and economic growth.

Four issues deserve prominent attention in the context of the discourse of PLI:

1. Import Protectionism:
   • The government is pursuing import-substituting industrialisation (ISI) by rewarding import-dependent industries.
   • The adopted measures include:
     • extending the protection of specified tariff lines
     • introducing non-tariff barriers to curb imports
     • the relevance of exports in the overall growth strategy
     • incentivising domestic manufacturing by extending production incentives
     • promoting investments both domestically and internationally.
   • This strategy is similar to the “infant industry argument” where the government provides protection to domestic industry.
   • Due to the domestic political economy considerations, it is difficult to withdraw the financial assistance provided to the business or sector during its infancy.
   • Gradually, it becomes a norm, and companies in other industries begin to demand comparable subsidies and financial incentives.
2. Biasness Towards Capital-Intensive Industries:
   • The PLI system is intrinsically biased towards capital-intensive industries as opposed to employment-generating labour-intensive industries in which India holds a comparative cost advantage.
   • This will inevitably lead to a decrease in job creation resulting in increasing socioeconomic disparities.
   • In selecting specific industries under the PLI scheme, the government appears to be “picking winners” rather than allowing market forces to distribute resources.
   • The government’s capacity to “select winners” may be limited by administrative competencies and information processing to make evidence-based policy interventions, leading to misallocation of resources and promotion of oligarchies.
3. Heterogeneity of Firms Within and Across sectors:
   • The need for subsidies in each area vary considerably and depends on its level of growth and technological expertise.
   • To maintain optimal levels of production, sectors with a high reliance on technology, such as the pharmaceutical industry, need more funding for research and development and innovation infrastructure.
   • The PLI system scarcely considers these intricacies.
   • Instead, the PLI plan extends financial incentives to firms rather than the industry as a whole in order to scale up production, disregarding the capacity and heterogeneity of firms operating in each sector, thus creating deeper structural concerns within the given sector.
   • A one-size-fits-all strategy may not be appropriate for specific industries when the level of corporate heterogeneity is significant.
   • The extensive coverage of industries under the PLI plan is difficult to implement and may prove to be an impediment in achieving the scheme’s objectives.
4. Incompatibility with GVC(Global Value Chain) led trade:
   • The present global trade framework is incompatible with the policy to enhance domestic output through subsidies and other means, such as import restrictions.

What is the way forward?

1. Liberal trade System: The world of value-chains requires a liberal trade system in order to provide firms access to competitive and high-quality raw materials and intermediate inputs in the global market.
2. Export Focused Assembly Operations: Free and stable trading environment will encourage firms to engage in export-focused assembly operations.
3. Sunset Clause: Pre-defined Sunset clause on the scheme can help the industries in the long run as they will see it as a one time opportunity for capacity building and economic viability without protection.
4. Focus on Labour Intensive Industries: This will help create mass scale job creation reaping the benefits of the country’s huge demographic dividend.

Conclusion:

• The implementation of the PLI plan is complicated by India’s industrial architecture, which is hampered by a highly fragmented production structure that generates a particular “missing middle” problem.
• The manufacturing sector is composed of a concentration of Micro, Small, and Medium-Sized Enterprises (MSMEs) on one end of the spectrum and a few giant enterprises on the other.
• In this context, this policy may end up expanding the gap between small and large businesses, compounding the existing “missing middle” problem.
• Recognising these concerns with the PLI scheme, it is crucial to realign the PLI scheme in the light of globalised commerce, which requires open, liberal, and transparent policies, otherwise, the country is doomed to return to the pre-liberalisation age of 1991.

Source: The Hindu BL

Mains Question:

Q. The PLI scheme ignores the inherent and systemic issues with respect to its design, nature, and coverage that may have far-reaching effects on manufacturing, exports, and economic growth. Elaborate.