Success of scheme depends on proxies chosen; the $200 criterion for phones ensures large exports for instance
It is not clear what finance minister Nirmala Sitharaman meant when, last month, she spoke of how socialist policies “of past decades” had held our economy back and needed to be jettisoned, but the production-linked-incentive (PLI) scheme that the Cabinet cleared on Wednesday – like the one for mobile phones some months ago – could well be an instance of how India plans to change tack. In the past, and even today, India gave incentives – such as those to boost exports – to everyone, indeed even today many remain biased towards MSME players; to remain small was beautiful since you got exemptions from various laws like those on labour as well. The MEIS export-incentive scheme, for instance, is given to 85-90% of exporters today, to around three-fourths of all goods while, in practice, the number of items – tariff lines, in jargon – where exports are growing well is much smaller. The PLI scheme for mobile phones, on the other hand, was not for everyone; given the stiff annual incremental production targets – Rs 25,000 crore over the base level by the fifth year – it essentially aimed at getting global biggies like Apple and Samsung to produce in India. Both control the lion’s share of the $300-bn global export market and given how fast India’s mobile components imports are rising – to meet the demand for even low-cost handsets – getting global players to export from India is critical.
This wooing of global-sized players, who can produce global-quality output and then export it as well, is what the new Rs 200,000-crore PLI scheme aims at. Details of the exact scheme for each of the 10 sectors chosen – restricting the scheme to just 10 sectors is itself a big change from the past – are yet to be finalized; the Cabinet just approved of an umbrella plan, as a concept in a sense. We know that, of this, the auto and auto component sector will get Rs 57,000 crore; the exact plan is expected to be out within three to four weeks. Since subsidizing exports is against WTO rules, the PLI is given on domestic production, but certain proxies – or rules – are put in place to ensure the bulk of the production is exported. In the case of mobile phones, the Rs 40,000-crore incentive over five years is to be given only for phones whose ex-factory price is $200 or above; since this means a fairly steep retail price of around $320-350, the government estimates 70-75% of the incremental production of around Rs 800,000-crore will be exported as the domestic market for expensive phones is limited. As an aside, the GST the government will collect on the balance that is sold in India will more than cover the value of the incentive being given.
For the new PLI scheme to work, then, the government will have to choose the proxies very well; else the scheme will quickly deteriorate into just an incentive scheme for local production, though it is of course true that if the incremental production targets are steep enough, this will require global scale of production and that, in turn, has a better chance of being exportable. In the case of automobiles, given how the largest part of the India’s market is for small cars – in both length and engine capacity – one way to encourage exports is to give the PLI only for big cars. Of course, if all that does is to reduce the cost of bigger cars for the local market, this will defeat the purpose. The final word on the schemes, then, will depend on how imaginatively they are designed; but there can be little doubt they represent a bold attempt to try and break away from the past.