‘PLI scheme to nudge OEMs towards local sourcing for greater Made-in-India capacity utilisation of MSMEs’

March 28, 2021 6:18 PM

Ease of Doing Business for MSMEs: The PLI scheme has an anchor-led model that will enable OEMs to adopt an import-substitution approach and thus shift towards greater collaboration with Indian MSMEs to plug them into the global manufacturing supply chain ecosystem.

Union Budget, Budget 2021The PLI scheme will facilitate bulk order generation for MSMEs.
  • By Rahul Garg

Ease of Doing Business for MSMEs: The manufacturing supply chain in India is witnessing a rebound within a year of the announcement of the Productivity Linked Incentive scheme for 13 sub-sectors. Envisaged at an outlay of Rs 145,000 crores, the scheme is expected to recharge job growth and manufacturing output. It has already attracted investment proposals worth Rs 5100 crores in pharmaceuticals and another Rs 11000 crores in large-scale electronics manufacturing. These numbers reflect a robust takeoff for the scheme despite a very challenging business climate due to the pandemic. Indian MSMEs have an array of opportunities to look forward to over the coming five to seven years. The PLI scheme has an anchor-led model that will enable OEMs to adopt an import-substitution approach and thus shift towards greater collaboration with Indian MSMEs to plug them into the global manufacturing supply chain ecosystem.

PLI-Product Lines Have High Domestic Demand

The product lines that come under the PLI scheme’s ambit have high domestic demand. Manufacturing enterprises pursuing greenfield and brownfield investments through the FDI window can leverage India’s domestic market for manufactured goods first. Pharmaceutical makers, for instance, can look forward to exploring opportunities in India’s global leadership in the COVID19 vaccine supply chain. Electronics manufacturers can leverage the opportunities in India’s domestic consumer electronics devices market. ACC battery makers can find opportunities in India’s EV manufacturing ecosystem. In the same vein, steel manufacturing OEMs can connect to opportunities in India’s National Infrastructure Pipeline projects that are worth Rs 111 lakh-crores.

Policy Integration Makes Import Substitution Economically Viable

Currently, imports account for 21 per cent of India’s GDP. A switch to local sourcing opportunities in sub-sectors like chemicals, automotive, agro-based industries, pharmaceuticals, consumer electronics, steel, and leather goods can unlock cost savings worth USD 33.6 billion for large manufacturers in India. The PLI scheme’s heart is the integrated policy design that will enable OEMs to source a higher value of their finished goods from the local manufacturing supply chain ecosystem. Previous policy initiatives have already laid the foundation for large OEMs to explore investment opportunities to make in India. Some of these initiatives are the National Resource Efficiency Policy 2019, the compression of 29 Labour Codes into 4, the lowering of corporate income tax rates, and the tariff rationalization announced in the Union Budget 2021. These initiatives in unison with the PLI scheme make import substitution economically viable.

Backward Linkages Will Pass-Through Incentives to MSMEs 

The PLI scheme envisages an annual increment in sales of goods made in India and minimum capital investment caps as the two factors for identifying the beneficiaries. The uniqueness of the PLI scheme’s systemic design will nudge large OEMs towards local sourcing for greater “Made in India” capacity utilization of Indian MSMEs and foster strong OEM-MSME partnerships. The supply chain collaboration will ensure a pass-through of the 4-6 per cent cost cushion to MSMEs in the short-term, helping them develop cost competitiveness in the long run.

Also read: Nitin Gadkari: Govt not aware of corporates setting up MSE subsidiaries to get public procurement tenders

Capacity Expansion Will Enable Cost Optimization

One of the biggest hurdles that have constrained India’s MSMEs’ cost optimization efforts is the suboptimal plant size and scale of operations. For Indian MSMEs to rationalize costs, they need to attain a minimum feasible scale in the long term. We have it from the conventional wisdom that the demand for manufactured output drives capacity expansion. While keeping OEMs at the leading edge of the supply chain ecosystem, the PLI scheme will facilitate bulk order generation for MSMEs. It will, in turn, enable Indian MSMEs to invest in plant capacity expansion, unlock economies of scale accruing from large order sizes, and optimize costs of production.

Diffusion of Knowledge Will Make MSMEs Globally Competitive

The lack of technical expertise and managerial know-how has traditionally been the Achilles heel of Indian MSMEs. The PLI scheme by virtue of incentivizing greater local manufacturing by OEMs will unlock the doors for Indian MSMEs to plug into Transfer of technology (ToT) agreements that, beyond inviting equity capital, will drive the diffusion of knowledge, managerial know-how, and supply chain best practices and propel Indian MSME suppliers towards achieving global competitiveness.

Sticky Supply Chains of the Future: Closer to Points of Manufacturing or Consumption?

The critical question facing manufacturing enterprises amid global supply chain disruptions, fiscal headwinds, tariff wars, and cross-border coordination uncertainties is the decision to migrate either towards points of manufacturing or points of consumption. Typically, geographies that offer robust consumption opportunities do not provide manufacturing, sourcing, and assembling opportunities and vice versa. Amid global manufacturing enterprises’ search for destinations that combine proven consumer power with manufacturing potential, India comes across as a potential contender that can make both the ends of manufacturing and consumption meet within a single supply chain ecosystem, thanks to the PLI scheme booster shot for MSMEs.

Rahul Garg is the Founder of Moglix. Views expressed are the author’s own.

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