Measuring success

Increasing PLI allocation will not be enough

In another attempt to boost electronics manufacturing, the Union Cabinet on Wednesday approved the production-linked incentive (PLI) scheme 2.0 for IT hardware with a budgetary outlay of Rs 17,000 crore, compared to the previous allocation of Rs 7,325 crore. The scheme is aimed at incentivising the production of devices such as laptops, tablets, personal computers, and edge computing devices in the country. The tenure of the scheme has also been increased to six years from four years. The average incentive has been enhanced to 5 per cent compared to 2 per cent offered in the previous version of the scheme. Companies using local components will now get additional incentives. At the aggregate level, the incentive could go up to 8-9 per cent of incremental sales. With the modified scheme, the government expects an investment of Rs 2,430 crore in the sector during the given period. It also expects the revised scheme to create 75,000 direct jobs and boost production by Rs 3.35 trillion.

The government’s intent clearly is to boost electronics manufacturing, which would not only reduce India’s dependence on imports but also create jobs in the country. While the broad objective cannot be faulted, given that India needs to create a large number of manufacturing jobs for its ever rising workforce, the approach remains puzzling. As the government has stated, electronics manufacturing has been witnessing consistent expansion with a 17 per cent compound annual growth rate over the past eight years. The annual production value is estimated to have crossed $105 billion, or about Rs 9 trillion. It has also been noted that India has emerged as a trusted supply-chain partner for global players and large companies are willing to invest in India.

It is thus worth asking if the sector is witnessing good growth and a number of multinational firms are willing to invest, why is the government increasing fiscal incentives? If investors are willing to invest in India, why did the earlier version of the scheme not yield the desired results, and will increasing the budgetary outlay do the trick? A recent report in this newspaper, for instance, showed the target for electronics manufacturing would be missed by a significant margin by 2025-26. Exports would be worth 53-55 per cent of the stated target. In the case of IT hardware, in particular, against the target of $25 billion, production is estimated to touch only about $6 billion, which partly explains the revision in the scheme.

At a broader level, the budgetary outlay may not be the biggest worry. At the time of the introduction of the PLI scheme, some economists were justifiably concerned about the extension of fiscal support in this manner to attract investment. But the outgo has been fairly limited so far, partly because of the subdued performance of firms in different sectors. The bigger policy risk now seems to be the dependence on PLI, as the increase in allocation suggests, which could deviate focus from all that needs to be done to create enabling conditions for a large and diverse manufacturing base in the country. The fiscal incentive can be only one of the many variables determining actual investment decisions. With increasing experience and evidence, policymakers thus would do well to re-evaluate if the scheme would help drive long-term investment and negate India’s aversion to large trade agreements. As things stand today, the answers may not be convincing.