India launched the production-linked incentive scheme (PLI) in 2020 across across 13 sectors, to

provide fiscal incentives to boost domestic manufacturing. While the November 2020
announcement included a broad contour of sectors covered and the incentive structure, the
finalization of detailed policies with operational guidelines and selection of beneficiary companies
were left to respective ministries

In the two years since then, progress on implementation has been uneven across sectors. While
some sectors like electronics and solar saw strong interest and timely policy decisions, other sectors
such as speciality steel witnessed persistent delays. New sectors such as semiconductors got
included in the scheme and at the same time new product categories got added in the scope of
existing sectoral schemes. In a nutshell, the government has been busy tweaking policy contours to
factor in revised global market conditions and industry demands.

The automobile sector saw the most notable change in the policy stance, which somehow was
unavoidable, given the rapid emergence of electric vehicles (EV). The earlier framework, with a total
incentive of Rs 57000 crore, focused on capturing global market share by promoting assembly
activities in India and leveraging India’s strong component manufacturing. However, globally, OEMs
have been shying away from committing capital to internal-combustion engine (ICE) capacities, given
the rising penetration of EVs. Indian government, through a policy tweak in September 2021,
announced a much focused (and smaller) scheme with incentive of Rs 25900 crore focusing on EV
and associated EV parts. This policy stance is certainly futuristic and aims to make India
manufacturing hub for the global EV market. However, in the near-term, it may not immediately
benefit a large proportion of Indian ICE dominated automobile market (including CNG).

The electronics segment (including IT hardware) saw strong interest by corporates (both domestic
and global) and swift action by government in terms of policy notification and selection of
beneficiaries. For instance, four international companies were selected as against maximum five
allowed under the policy; and the sector was the first recipient of PLI incentives. However, despite
timely completion of manufacturing capacities by the corporates; utilization levels were subdued as
the pandemic affected global demand and semi-conductor availability. While the government
accommodated this by extending the scheme by one year to FY22 to FY25, most likely, corporates
would miss their production targets for FY22 as well. Notwithstanding the near-term hiccups, the
electronics’ sector is likely to be the biggest beneficiary of the scheme.

The biggest disappointment was seen in the speciality steel segment, which was expected to attract
investments worth a staggering Rs 40000 crore. Steel ministry has extended the deadline for
application four times from its initially envisaged deadline of 30 April 2022. Another issue that
industry players are highlighting is that construction time-frame for such facilities are typically 2-3
years, which would leave little room for the applicant to avail incentives within the five-year time
frame. While the latest deadline expired on 15 September 2022, implementation of the PLI scheme
for the sector remains work in progress.

Similarly, PLI benefits for pharmaceutical companies are also expected to be muted. As per Ind-Ra’s
understanding, majority participants (except one) in the scheme have miniscule investment plans
with one-two API molecules. Also, large dependency for raw material from China is also not
addressed. Nevertheless, in the past, pharmaceutical has shown strong growth in exports even
without any policy incentives.

Another sector that saw slow progress on implementation of the scheme was textiles, with
operational guidelines of the scheme only getting notified in December 2021. However, the ministry
acted swiftly and approved a list of companies by April 2022 with a total investment of Rs 19100
crore. The scheme is promising given that it targets manmade fibres segment, where China has a
dominant presence. As per reports, government is also intending to launch PLI-2, where scope could
cover entire textile value chain including apparels, home textiles and cotton.

The semiconductor segment was a new addition in the PLI scheme with a notification issued in
December 2021 only with planned incentives of Rs 76000 crore. The PLI scheme is India’s third
attempt after fiscal duty benefit announcements made in 2007 and 2013. Setting up a
semiconductor facility is a technologically complex task, which can possibly explain why India’s plans
have had limited success. While we have already seen an announcement to set up large facility, the
same requires to be monitored.

To summarize, there has been a remarkable shift in the government’s focus over the last two years
from “low value-add assembling activities” to “high value-add futuristic manufacturing activities”.
Providing incentives to new-age sectors such as electric vehicles, solar, semi-conductors clearly
indicates that the government is focusing on long-term sustainability of India’s manufacturing
sector. PLI-1 could be the start of the process, which may get followed up with several policy tweaks.
Benefits of such measures would be back-ended and may not be visible in immediate fiscal numbers.
Nevertheless, the government’s objective of making Indian manufacturing future-ready is a step in
the right direction.