Battling the Barrier of Scale
Indian manufacturing has long suffered due its inability to scale up. We have been slow at adopting new technologies and often not been able to gain an early mover’s advantage. Once the initial momentum is missed, and the global competition built, it is difficult to achieve a significant market share. As much as 70% of our exports are in the traditional segments, for which the world market has shrunk to just about 30%. We should instead be focusing on the sunrise segments, where there is an ample scope to grow and build a high market share.
For India to become a USD-5-trillion economy, our manufacturing sector has to sustainably grow in double digits. Our manufacturing companies must become an integral part of global supply chains by focusing on cutting-edge technology sectors, along with sectors of its core competency and high employment generation potential. If India has to grow at high rates for the next three decades, it needs to strategically focus on building a strong manufacturing base, with global champions capable of producing for the world. Nearly all the countries that have transitioned from low to high per capita income have managed this shift on the back of manufacturing and export-led growth.
The recently launched Production Linked Incentive (PLI) scheme-which has committed nearly ₹1.97 lakh crore (USD 26 billion) over the next five years, from FY 2021–22-is a gamechanger in this regard. It seeks to bring size and scale to India’s manufacturing capabilities and exports in key sectors, while creating and nurturing global champions. The scheme incentivizes increasingly enhanced production for a limited number of eligible anchor entities, in the key sectors, within a limited timeframe. The scheme is expected to generate an incremental production of USD 520 billion over its predefined timeline of five years, making it one of the biggest timebound support initiatives of the government to boost growth in the manufacturing sector.
Given that the PLI scheme has pre-committed levels of investment and production, and the fact that it is timebound, it cannot be labelled as either an investment scheme or a subsidy scheme. It is different from previous such attempts due to its clear mandate of selecting only the most eligible sectors that can attract maximum investments and scale rapidly to provide the maximum returns in terms incremental production, employment generation and exports. Also, it specifically avoids the risk of spreading available resources thinly-a mistake that resulted in the Merchandise Exports from India Scheme (MEIS) from providing the expected boost to Indian exports.
With a focus on building a strong manufacturing segment, the PLI scheme is designed to identify and support upcoming technologies that are indicative of the largest economic opportunities of the next few decades. These include advance chemistry cell batteries, electronic and technology products, and solar photovoltaic modules-three critical areas for sustaining rapid growth in the futuristic segments of digital economy, electric vehicles, and renewable energy, respectively. Robust large-scale manufacturing setups in these segments are essential for taking on Asian competitors that have made strong progress in one or more of these areas. These three sectors have an equally crucial role in bringing rural India into the mainstream grid of continuous electricity and high-speed digital connectivity.
Manufacturing in sectors such as automobile and auto components, pharmaceuticals, telecommunications, white goods, and steel is rapidly becoming globally interconnected. These sectors are also important in terms of their strategic importance, contribution to GDP and employment-generation potential.
Finally, the scheme aims to generate massive employment by focusing on the development of labour-intensive sectors such as food processing and textiles-the current export basket of these two segments consists of a large volume of low-value products. Encouraging large manufacturers to bring technology and build capabilities for high value output is likely to rectify the situation by providing higher returns to upstream producers. It will also enable an increase in exports.
Beneficiaries of the PLI scheme are shortlisted on the basis of their commitment towards achieving scale, while meeting other specified performance parameters, such as minimum investments and minimum incremental production growth. The scheme is fully self-sustaining as the benefit is given to the selected company only after investment and production have taken place in India.
The PLI scheme is also expected to stimulate manufacturers to seize emerging international opportunities in the changing geo-political orientation of the world. It is expected to have beneficial spillover effects via the creation of a wide supplier base for the anchor units established under the scheme. Along with the anchor units, these supplier units will help to generate high primary and secondary employment opportunities.
In an increasingly interconnected world, manufacturing has been transformed into a series of dependent processes across multiple countries, which together form large global value chains (GVCs). With GVCs slowly shifting towards the East and due to the constantly evolving geopolitical dynamics in the world, there is massive opportunity for India to capture certain segments by leveraging its strengths and with dedicated support from the government. From the national perspective, the PLI scheme is a policy tool devised to attract investments in areas of strength and to strategically enter certain segments of GVCs, with an aim to bring scale and size in key sectors and create and nurture global champions.
*Amitabh Kant is CEO and Yuvraj Patil is Public Policy Consultant, NITI Aayog. Views expressed are personal.
*An edited version of this article was published in Economic Times on 10 April 2020.