GTRI suggests criteria to simplify granting incentives under PLI schemes

Economic think tank GTRI has flagged the slow progress in disbursement of sops under production-linked incentive (PLI) schemes and suggested the government to simplify the criteria so as to expedite grant of incentives and push domestic manufacturing.

The Rs 4,415 crore disbursement is only 2.25 per cent of the total outlay of Rs 1.97 lakh crore of incentives over five years under the PLI schemes announced in 2020, the Global Trade Research Initiative (GTRI) said on Sunday.

"This slow fund spend is unsurprising, considering that setting up greenfield or new manufacturing operations takes time," it said.

"PLI criteria for various sectors include thresholds on investments, production, sales, degree of localization, inputs used and many more. Manufacturers may not be able to tick on all boxes," GTRI Co-Founder Ajay Srivastava said.

Citing an example, he said in one of the cases, the government suspected the invoice value and disallowed the incentive of a few hundred crore.

"In most cases, it is difficult to ascertain the actual value of a product or invoice. Doing this makes incentives subjective and delays the settlement of claims. Guidelines should be few and transparent.

"The MEIS (merchandise export from India scheme) export scheme (abolished in 2020) implemented by the Department of Commerce was a good example of a simple scheme," Srivastava said.

In the MEIS, the department received all information needed from customs and banks and did not rely on firms for any supporting data. Simple scheme design made disposal of thousands of applications possible electronically without human intervention.

"PLI needs to study similar simple models," the GTRI said.

The think tank also suggested the government to introduce the PLI scheme for making specific inputs, and not for products with many big or small manufacturers, it added.

"PLI money at the rate of 4-6 per cent of incremental sales could increase profit margins by 30-40 per cent, giving a considerable price advantage over others. Non-PLI recipients suffer for no fault," it said, adding the scheme should avoid incentivizing such sectors.

The scheme should focus only on cutting-edge product groups where India has no manufacturing capabilities, Srivastava said.

Further, he said that smartphones is the star PLI sector and most PLI money has been claimed by the smartphone firms due to high production.

But the sector must overcome three weaknesses to become sustainable in long term, GTRI said.

"So far, smartphone makers' investment of Rs 7,400 crore has resulted in production valued at Rs 412,000 crore. This translates to every rupee invested, yielding Rs 55 in production value.

"This ratio is expected to exceed Rs 100 by the end of the PLI scheme. Consequently, the PLI incentives might surpass the investments by the end of the scheme," it added.

Srivastava said that this raises a concern that many manufacturers might cease production once the incentives end.

He added that historically, the introduction of the Goods and Services Tax (GST) in 2017, which abolished tax arbitrage, led to the disappearance of many local smartphone makers.

Similarly, in 2018, an increase in the MEIS rate from 2 per cent to 4 per cent resulted in a significant rise in mobile phone exports in a single year, but most firms vanished with the abolition of MEIS, he added.