Why in the News?

With the first phase of the Production-Linked Incentive (PLI) scheme showing progress, the Central government is exploring the modifications in PLI 2.0 Scheme.

What’s in Today’s Article?

• Introduction (Context)
• About PLI Scheme (Overview, Challenges, PLI 2.0, Comparisons, etc.)

Introduction

• The Production-Linked Incentive (PLI) scheme, introduced in April 2020, aims to enhance India’s manufacturing capabilities and attract global companies to set up production facilities in the country.
• Covering 14 sectors, the scheme incentivizes incremental sales to drive manufacturing growth.
• However, five years into its implementation, the government is considering modifications for PLI 2.0, linking incentives to additional metrics such as domestic value addition and incremental exports.

Overview of the PLI Scheme

• The PLI scheme was launched with the following key objectives:

• Boost domestic manufacturing and reduce import dependence.
• Attract original equipment manufacturers (OEMs) and contract manufacturers.
• Encourage investment in high-tech sectors like electronics, semiconductors, pharmaceuticals, and specialty steel.
• Enhance India’s participation in global supply chains.
• Create employment and promote skill development in manufacturing.

• The scheme has seen notable success in sectors such as mobile phones, pharmaceuticals, and food processing. However, in certain sectors like IT hardware, advanced chemicals, textiles, and specialty steel, progress has been slower than expected.

Challenges in the Existing PLI Framework

• Low Value Addition:

• Even in successful sectors like mobile manufacturing, the percentage of local value addition remains in single digits.
• Critical components such as semiconductor chips and subassemblies are still imported.

• Limited Domestic Market Size:

• Sectors like telecom and electronics do not generate sufficient demand to encourage large-scale local manufacturing.
• Export-led growth is essential to drive economies of scale.

• Foreign vs. Domestic Players:

• Indian manufacturers struggle with cost competitiveness compared to their Chinese and Vietnamese counterparts.
• Limited access to international markets and lower technological capability reduce India’s bargaining power in the global supply chain.

• Dependency on Foreign OEMs:

• Currently, global players drive the manufacturing ecosystem, while Indian firms remain dependent on them for critical technologies.
• Lack of indigenous R&D investment in semiconductors, specialty steel, and advanced chemical cells remains a key hurdle.

PLI 2.0: Proposed Reforms for Sustainable Growth

• To address these challenges and refine the PLI scheme, policymakers are considering several key reforms:
• Linking Incentives to Value Addition
  • Instead of rewarding companies solely based on incremental sales, PLI 2.0 proposes higher incentives for firms that achieve a greater percentage of domestic value addition. This includes:
    • Promoting localization of key components like semiconductors and printed circuit boards (PCBs).
    • Supporting indigenous R&D and manufacturing to reduce import dependence.
• Export-Oriented Incentives
• To make Indian manufacturers globally competitive, PLI 2.0 aims to link incentives with export performance, ensuring:
• Increased production volumes.
• A globally competitive cost structure through economies of scale.
• Enhanced participation in international value chains.
• Strengthening Local Component Manufacturing
  • One of the biggest limitations of the current PLI scheme is the lack of a robust component ecosystem. Proposed measures include:
  • Encouraging joint ventures with global companies to build an ecosystem for sub-components and advanced manufacturing.
  • Ensuring foreign OEMs help in technology transfer and capacity building for local manufacturers.
• Supporting MSMEs and Domestic Players
  • Large-scale manufacturers dominate the PLI scheme, while small and medium enterprises (SMEs) struggle to compete. New reforms may focus on:
  • Special incentives for domestic MSMEs engaged in component manufacturing.
  • Credit support and infrastructure development to help small firms integrate into global supply chains.
• Focus on Semiconductor Manufacturing
  • Given the global semiconductor shortage and India’s reliance on imports, the government is expected to:
  • Provide stronger incentives for semiconductor fabrication units (fabs).
  • Push for the development of indigenous chip design and assembly capabilities.

Comparisons with Global Manufacturing Strategies

• India’s PLI strategy is inspired by the industrial policies of nations like China, Japan, and South Korea. These countries:

• Leveraged foreign OEMs to develop domestic ecosystems.
• Focused on technology transfer and local skill development.
• Used exports as a growth driver to build global manufacturing hubs.

• For instance, China’s electric vehicle (EV) industry was strengthened by allowing Tesla to establish manufacturing units. This move helped local suppliers improve their quality and capacity, eventually boosting homegrown brands like BYD, Li Auto, and Nio.

• India is now trying to replicate this model by using PLI to attract foreign investment while also developing domestic manufacturing capabilities.

Conclusion

The PLI scheme has set India on the path to becoming a global manufacturing hub, but challenges remain in scaling up, increasing local value addition, and making domestic firms globally competitive. As discussions on PLI 2.0 progress, the government aims to introduce reforms that prioritize exports, component localization, and MSME support.

With the right policy interventions, India can bridge gaps in the supply chain, improve competitiveness, and establish itself as a leader in global manufacturing.