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Potential of Product Linked Incentive (PLI) scheme to transform manufacturing in India

India’s manufacturing sector has been contributing between 15% and 19% of GDP over the last decade. Transforming India into a global manufacturing hub would require a massive collective effort from both government and industry. The Make in India (MII) initiative was launched in 2014 to make this transition with the objectives of: increase manufacturing share to 25% of GDP, create 100 million new jobs, skilling of rural migrants and urban poor, improve domestic value addition in technology and manufacturing and thereby enhance India’s global manufacturing.

India has a fragmented manufacturing eco system in some sectors, whereas a mature system in some others. To become a globally competitive, there is a need to translate from labour intensive low margin products to technology and skill intensive value added production.

Despite the promising campaigns of 2014 and the subsequent years, private investment failed to significantly pick up. Along came a sudden demonetization which temporarily paralysed the economy. Note bandhi was followed by a patchy transition into a GST tax regime which aimed to organise India’s businesses and make taxation effective across the industry. The IL&FS crisis further discouraged capex addition by industry. Access to capital started to dry up as lending institutions became extremely risk averse. Finally, the coronavirus pandemic put a complete handbrake to all economic activity. Governments across the world had to loosen their purse strings to re-start the extremely scared economy. There seems to be finally light at the end of the metaphorical tunnel.

In May 2020, the Indian government launched the “Atmanirbhar Bharat Abhiyan” with an economic package of Rs. 20 trillion (20 lakh crore). The goal was to make India self-reliant, and one of the aspects of this ambitious project was the Production Linked Incentive (PLI) scheme.

While it is no secret that India usually runs a trade deficit (imports are greater than exports), it is widely believed that this is largely due to oil imports. The fact is that India runs a trade deficit even when only merchandise is considered. The table below depicts India’s monthly balance of trade in million USD.

A higher negative trade deficit negatively impacts the GDP. Every nation ideally prefers a trade neutral or trade surplus position. For India, this means increasing exports and decreasing imports at the same time. Take a look at India’s import to GDP ratio among emerging economies.

Source: Goldman Sachs Report

From the above chart, it is evident that there is a pressing need to reduce relative dependence on imports. Increasing domestic manufacturing will decrease imports and increase exports at the same time. A lower trade deficit or a trade surplus has a direct impact on GDP growth. Easy Peasy? Actually not so simple..

A manufacturing boom is only possible through systematic improvement in manufacturing infrastructure, R&D, highly skilled technical workforce, and most importantly an economic environment which allows for globally cost competitive production. Think better logistics, availability of good quality power and water and predictable taxation environment. Countries like China and South Korea have become prosperous, just because such focussed efforts were taken about 3 decades back by their governments.

In the past, our governments have tried various ways to trigger manufacturing surges by providing indirect support. Some of the examples of such incentives are: tax holidays (SEZs), import tariffs to protect uncompetitive domestic manufacturers, export incentives, social subsidies and the like. As economic and policy efforts go, all the above initiatives contribute in varying degrees to enhance the manufacturing sector. But none of them significantly bolsters it for a long duration. What has been missing is policy that is highly targeted and at the same time executable.

Most recently, the government launched the Performance Linked Incentive (PLI) scheme to try and achieve just that.

What is the PLI scheme? How does the PLI scheme work?

The government in consultation with industry has identified 13 sectors where imports are significant, and where a boost in manufacturing could have a significant value. They have identified product categories within these sectors which are strategically important. Companies that manufacture these products within India will be eligible for taking benefit of the PLI scheme.

Simply put, government will give companies cashbacks on achieving certain production targets in manufacturing of select pre-defined goods. Whether a company will be eligible for this PLI will be disclosed at the start so that there is complete focus on achieving the targets. The average cashback across sectors is 4-6% on incremental sales over base year of 2019-20 for a period of 5 years. To qualify:

- The company has to commit a certain amount of production each year

- The company has to commit a certain amount of investment in infrastructure/plant and machinery

*The clauses vary across product categories as well as are different for domestic and international manufacturers.

The main message here is as follows. Attain large production targets in products of strategic importance and the government will give you incentive on sales. Payment upon performance. There are only few companies that will get the nod to receive PLI incentives and hence the competition will be high. The maximum incentive is clearly defined for each product category so the qualifying company can plan accordingly. One can say that PLI incentives are so designed to only encourage large corporations to apply for the scheme.

Why is PLI scheme required?

Mature manufacturing companies need a nudge to make large investments in capacity addition.

Foreign companies need confidence that there is governmental support, access of quality workforce and low costs which can make India a good destination to set shop.

In case of domestic companies, the confidence needed is more on the know-how and R&D front, and the capital financing flexibility offered.

The PLI scheme could provide this very nudge to large industry houses to commit to production targets in return for incentives on sales. In case of foreign companies, they can become cost competitive by making in India. In case of domestic companies, they can risk investing more in R&D and modern technology to achieve targets.

By the time the 5 year targeted program is complete, there could very well be a well-oiled eco system of vendors, ample availability of well-trained man-power, lakhs of new jobs, efficient logistics infrastructure and local governments providing world class facilities to attract industrial investment. This is of course the most optimistic scenario. However, there is a long way to go before passing any verdict.

Will PLI only benefit large companies?

No. A host of MSMEs will act as feeder units to the PLI aspirant companies. Growth in manufacturing cannot be done in isolation and requires many specialised and general vendors contributing to the engine. Think of the mature automotive sector in India. The OEMs are large, but many of the key suppliers to these OEMs are themselves massive companies (think Minda, Endurance, Varroc and the likes). These Tier 1 vendors to OEMs themselves subcontract to Tier 2 suppliers and so on. This is typical of a healthy manufacturing eco-system. So PLI has potential to indirectly influence the entire value chain.

What is the allocated budget for the PLI scheme?

The table below denotes the budgeted outlay of the Indian government, approved by the cabinet. The incentives are capped to certain minimum as well as maximum threshold.

Source: Ministry of Commerce and Industry

PLI scheme in smartphone/electronics hardware:

Let’s take a finer look by understanding the eligibility criteria with the example of PLI scheme for electronics.

Source: Invest India

Source: MeitY

16 companies have received approval to participate with the PLI scheme for electronics and smart phone manufacturing.

Over the next 5 years, the approved companies under the PLI Scheme are expected to lead to total production of more than INR 10,50,000 crore (INR 10.5 lakh crore). Approved companies under Mobile Phone (Invoice Value INR 15,000 and above) segment have proposed a production of over INR 9,00,000 crore. The approved companies under Mobile Phone (Domestic Companies) segment have proposed a production of about INR 1,25,000 crore and those under Specified Electronic Components segment have proposed a production of over INR 15,000 crore.

The companies approved under the scheme will bring additional capex investment in electronics manufacturing to the tune of INR 11,000 crore. The machine tool sector could be one among many beneficiaries.

The companies approved under the scheme are expected to generate more than 2 lakh direct employment opportunities in next 5 years along with creation of additional indirect employment of nearly 3 times the direct employment.

Domestic Value Addition is expected to grow from the current 15-20% to 35-40% in case of Mobile Phones and 45-50% for electronic components.

Companies that have received approval under the PLI scheme

As of this writing, below is a list of companies that have been approved to avail of the PLI benefits based on their proposed manufacturing, investing and cost proposals submitted to the government.


- Natural Biogenex Private Limited (Betamethasone, Dexamethasone, Prednisolone)

- SymbiotecPharmalab Private Limited (Prednisolone)

- Macleods Pharmaceutical Limited (Rifampicin)

- Optimus Drugs Private Limited (Vitamin B1, Streptomycin)

- Sudarshan Pharma Industries Limited (Vitamin B1)

- Saraca Laboratories Limited (1,1 Cyclohexane Diacetic Acid)

- Emmennar Pharma Private Limited (1,1 Cyclohexane Diacetic Acid)

- Hindys Lab Private Limited (1,1 Cyclohexane Diacetic Acid)

- Aarti Speciality Chemicals Limited (2-Methyl-5NitroImidazole )

- Meghmani LLP (Para amino phenol)

- Sadhana Nitro Chem Limited (Para amino phenol)


International companies for Smartphones above INR 15000

- Samsung

- Foxconn Hon Hai (Apple)

- Rising Star

- Wistron (Apple)

- Pegatron (Apple)

Under Mobile Phone (Domestic Companies) Segment

- Lava

- Bhagwati (Micromax) Padget Electronics

- UTL Neolyncs

- Optiemus Electronics

Specified Electronic Components Segment

- AT&S

- Ascent Circuits

- Visicon

- Walsin

- Sahasra

- Neolync.


Government to launch eligibility criteria soon

Advanced Cell Chemistry Battery Storage:

The PLI scheme has earmarked ₹18,000 crore towards the advance cell chemistry, which aims at bringing on line at least 50 gigawatt (GW) of lithium-ion batteries to the market. Eligibility criteria is out but list of grants is awaited. More here: Niti Aayog invites bids for setting up Advance Chemistry Cell manufacturing facilities under PPP - The Financial Express

Telecom and Networking Products:

Detailed eligibility criteria draft is awaited. It is expected to include PLI for: switches, routers, radio access network, wireless equipment and other internet of things (IoT) access devices.

Textiles: will be offered for incremental production in 40 identified man-made fibre items and 10 technical textiles products. This sector is expected to receive some of the highest incentive rates. The detailed application criteria are still awaited. More details here: Production Linked Incentive for textiles may be capped to ensure better distribution - The Hindu BusinessLine

Food Processing:

Details to eligibility are awaited

High efficiency solar PV module:

Customs duty on some imported items in this sector will come into place from April 2021. This has caused expression of interest from 15 companies to invest $3 billion in solar manufacturing (import tariffs can work if done strategically in conjunction with other initiatives). The exact details on the eligibility criteria under PLI are yet unclear. More details here: 15 firms look to invest $3 billion in solar manufacturing (

White Goods (ACs and TVs):

Details to eligibility are awaited

Specialty Steel:

It is envisaged that the PLI scheme shall boost the production of identified specialty steel grades from the current 16 MTPA to over 37MTPA in 5 years, while attracting investments of over Rs 35,000 Cr. Further details are awaited

Will there be loopholes in PLI scheme?

While there are clearly defined criteria to avail the scheme, there may be ways in which manufacturers may tend to game the system. For instance, they may over inflate the cost of investments on their books. Conversely, they may even over inflate sales prices, show related party transactions to clock sales, or use innovative accounting (unscrupulous) to inflate sales figures. More than ever, execution and supervision will be key. The government will have to find a balance between excessive supervision and oversight to create the healthy competitive atmosphere to make this happen.

Final thoughts:

The uptake in pharma and electronics PLI scheme is very encouraging. It signals that the eligibility expectations are in line with manufacturer capabilities. Once the commitment in all the other sectors are also made by industry, the government has to ensure that performance is assessed and rewarded in a timely manner to keep the drive.

There is no doubt in my mind that companies are driven by this scheme, some out of pure interest of expanding in a favourable subsidized environment and others simply to avoid the fear of missing out. Regardless of the intent, this scheme bodes well for manufacturing sector in India. It has the potential to create jobs in lakhs, trigger a large capex cycle, introduce cutting edge technology manufacturing in India via foreign players, and encourage an attitude of risk taking.

Prime Minister Narendra Modi recently remarked that this scheme has is likely to boost India’s manufacturing output by $520 billion in 5 years. If successful, it will be a large economic leap for a country whose time has come.

We are offering various investment ideas to our paid subscribers in the PLI scheme. The rub off impact of the PLI will be visible in the broader ecosystem. Subject matter expertise is needed to identify the same. Contact us for more.

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