India’s aspiration to become a global manufacturing powerhouse, rivalling the likes of China, has encountered a significant hurdle. The Production-Linked Incentive (PLI) scheme, a flagship initiative launched in 2020 with the ambitious goal of boosting domestic production and attracting substantial foreign investment, is now poised to lapse. While the scheme did manage to lure some major players, including Foxconn and Reliance Industries, its overall impact has fallen short of expectations. The disbursement of funds remained significantly below the allocated amount, and the manufacturing sector’s contribution to the Indian economy has actually declined during the scheme’s tenure. This development necessitates a critical evaluation of the PLI scheme’s shortcomings and a strategic shift towards more effective support mechanisms for the manufacturing sector.

The PLI scheme was conceived as a bold and proactive measure to address the structural weaknesses that had long plagued India’s manufacturing sector. For decades, India’s manufacturing growth had lagged behind that of its Asian neighbors, particularly China. Factors contributing to this underperformance included inadequate infrastructure, bureaucratic hurdles, complex regulations, and a lack of scale in production.

The PLI scheme aimed to overcome these challenges by offering financial incentives to companies that increased their domestic production in specific sectors. The incentive structure was designed to reward incremental sales, encouraging companies to invest in expanding their manufacturing capacity and improving their competitiveness. The scheme initially focused on sectors such as mobile phones, pharmaceuticals, and medical devices, and was later expanded to include automobiles, textiles, food processing, and white goods.

The underlying rationale was that by incentivizing domestic production, the PLI scheme would stimulate investment, create jobs, reduce import dependence, and ultimately transform India into a major manufacturing hub. The government envisioned that the scheme would attract both domestic and foreign investment, leading to significant technology transfer and the development of a vibrant manufacturing ecosystem.

Despite the lofty ambitions and the initial enthusiasm, the PLI scheme has not delivered the desired results. Several factors contributed to the scheme’s shortcomings:

* The production targets set under the PLI scheme were arguably too aggressive, particularly given the prevailing economic climate and the structural challenges faced by the manufacturing sector. Many companies found it difficult to meet these targets, especially in the face of global economic headwinds and supply chain disruptions.

* The implementation of the PLI scheme was hampered by bureaucratic delays and complex procedures. Companies faced challenges in navigating the application process, complying with the scheme’s requirements, and receiving timely disbursements of incentives. These delays and complexities created uncertainty and discouraged investment.

* Despite some improvements in recent years, India’s infrastructure remains inadequate to support a large-scale manufacturing sector. Poor roads, unreliable power supply, and inadequate port facilities continue to be major constraints for manufacturers.

* The cost of capital in India is relatively high compared to other countries, making it more expensive for companies to invest in manufacturing. High interest rates and complex financing procedures discourage investment and make it difficult for Indian manufacturers to compete with their global counterparts.

* The COVID-19 pandemic and the subsequent global economic slowdown have significantly impacted the manufacturing sector worldwide. Supply chain disruptions, reduced demand, and increased uncertainty have made it more difficult for companies to invest in new capacity and expand production.

* While the PLI scheme focused on providing financial incentives, it did not adequately address the underlying systemic issues that hinder manufacturing growth in India. These issues include complex labor laws, rigid land acquisition policies, and a lack of skilled labor.

The statistics surrounding the PLI scheme paint a stark picture of its underperformance. Out of the $23 billion allocated for the scheme, only $1.73 billion had been disbursed by October 2024. This indicates that a significant portion of the funds earmarked for the scheme remained unutilized.

More worryingly, the manufacturing sector’s share in the Indian economy declined from 15.4% to 14.3% during the scheme’s tenure. This suggests that the PLI scheme failed to achieve its primary objective of boosting manufacturing output and increasing the sector’s contribution to the overall economy.

With the PLI scheme nearing its end and its limited success, the Indian government is now exploring alternative strategies to support the manufacturing sector. One option under consideration is reimbursing investments for setting up plants. This approach would involve providing financial assistance to companies that have already made investments in establishing or expanding their manufacturing facilities.

Other potential strategies include:

* Investing in improving infrastructure, such as roads, ports, and power supply, is crucial for creating a conducive environment for manufacturing. The government needs to prioritize infrastructure development and ensure that manufacturers have access to reliable and affordable infrastructure.

* Simplifying regulations and reducing bureaucratic hurdles is essential for making it easier for companies to set up and operate manufacturing facilities in India. The government needs to streamline the regulatory framework and create a more business-friendly environment.

* Investing in skill development and vocational training is crucial for ensuring that the manufacturing sector has access to a skilled workforce. The government needs to work with industry to identify skill gaps and develop training programs that meet the needs of the manufacturing sector.

* Encouraging innovation and technology adoption is essential for improving the competitiveness of Indian manufacturers. The government needs to provide incentives for research and development, and support the adoption of new technologies in the manufacturing sector.

* Reforming labor laws to make them more flexible and business-friendly is crucial for attracting investment in the manufacturing sector. The government needs to balance the interests of workers with the need to create a competitive business environment.

The lapse of the PLI scheme marks a critical juncture for India’s manufacturing ambitions. The scheme’s shortcomings highlight the need for a more comprehensive and nuanced approach to supporting the manufacturing sector. While financial incentives can play a role, they are not a substitute for addressing the underlying systemic issues that hinder manufacturing growth in India.

The government needs to adopt a multi-pronged strategy that focuses on infrastructure development, regulatory reform, skill development, innovation, and labor law reform. By creating a more conducive business environment, India can attract investment, boost manufacturing output, and achieve its goal of becoming a global manufacturing powerhouse. The future of Indian manufacturing depends on learning from the lessons of the PLI scheme and adopting a more effective and sustainable approach to supporting the sector. This requires a commitment to long-term systemic reforms, a focus on creating a level playing field for domestic manufacturers, and a willingness to address the challenges that have long plagued the Indian manufacturing sector. Only then can India realize its full potential as a global manufacturing hub.