Former RBI Governor Raghuram Rajan, in a note, has questioned the sustainability and implications of the Production Linked Incentive (PLI) scheme. He argued that the government should collate more evidence before rolling out the scheme for more sectors.
The economist argued that the PLI scheme stems from the premise that India manufactures too little. Lack of infrastructure, high cost of finance, inadequate availability of quality power, limited design capabilities, and inadequacies in skills of Indian workers are some of the reasons why India is manufacturing so little. “Since addressing the weaknesses will take time, the government wants a faster alternative,” said Rajan.
He gave the example of the cell phone industry to make his point. Custom duties on mobile imports were increased by 20 per cent in 2018, increasing domestic prices of mobiles. “For example an iPhone 13 Pro Max is available under Rs 92,500 in Chicago, US inclusive of taxes while the same model with identical specs costs Rs 1,29,000 in India, a markup of 40%,” he said.
The PLI scheme offers manufacturers a government payment of 6% for every cell phone for the first year, down to 4% in the fifth year, provided they meet incremental investment and sales targets, he said, further adding that there is no limit on the minimum value of the cell phone that is to be produced in India. He pointed out that this means that a manufacturer could import all the parts and assemble and still get all the benefits of the scheme. States also add to this through GST waivers.
Rajan said that manufacturers are hence flocking to be selected for the PLI scheme since the combination of protection and subsidies make it a lucrative affair. But it is the Indian taxpayer who is paying for the subsidies not only for Indian firms selected under the scheme but also for international players like Foxconn and Wistron.
He also questioned the number of jobs being created by this scheme.
The economist also pointed out that even though exports have gone up substantially, they were up even before the PLI scheme – the last third of 2019 saw $1.6 billion of exports and $4.4 billion of imports, while in the last third of 2021, exports were $2.7 billion and imports were $5.2 billion. But imports were trending down but now they are trending up, which is indicative of PLI encouraging manufacturers to import parts as long as the assembling is done in India, he said.
He acknowledged that the PLI scheme must not be dismissed but questioned whether manufacturers will continue to produce even after the scheme is over. He argued that in a tight fiscal, the government has to choose, and could have done well by allocating these billions of dollars to schooling of children who lost out due to COVID-19.
He questioned why producers won’t shift to other countries when the scheme ends. Manufacturers could also continue production but also demand continued tariff and subsidy protection. They could also threaten to fire workers, leading the government to cave in fearing a failed scheme.
Rajan said that if PLI-induced domestic production does not become globally cost-competitive, it will reduce exports in other sectors. It is also not transparent as to which industries will get PLI schemes, he added.
“The real problem is that we are still trying policy shortcuts. They are no substitute for longer term tasks like enhancing human capital investment, creating a simple but fair land acquisition process, ceasing the constant rejigging of tariffs and taxes, that make it hard for producers to invest, and strengthening infrastructure. Nevertheless, we are rolling out the PLI scheme widely. Perhaps the government should first pause and first assess whether it works?,” Rajan said.
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