Former RBI Governor Raghuram Rajan, in a note, questioned the sustainability and implications of the Production Linked Incentives (PLI) scheme. He argued that the government should gather more evidence before rolling out the program to 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, insufficient availability of quality power, limited design capabilities and inadequacies in the skills of Indian workers are some of the reasons why India manufactures so little. “Since fixing the weaknesses will take time, the government wants a faster alternative,” Rajan said.
He gave the example of the cell phone industry to make his point. Customs duties on mobile phone imports were increased by 20% in 2018, which pushed up domestic prices for mobile phones. “For example, an iPhone 13 Pro Max is available for Rs 92,500 in Chicago, US including tax, while the same model with identical specs costs Rs 1.29,000 in India, a 40% markup.” , did he declare.
The PLI program offers manufacturers a government payment of 6% for each cellphone in the first year, up to 4% in the fifth year, provided they meet additional investment and sales targets, it said. he stated, adding that there was no limit on the minimum value of mobile phone that must be produced in India. He pointed out that this means a manufacturer could import all parts and assemble and still receive all the benefits of the scheme. States also add exemptions to the GST.
Rajan said manufacturers are therefore flocking to be selected for the PLI program since the combination of protection and subsidies makes it a lucrative deal. But it is the Indian taxpayer who pays the subsidies not only for Indian companies selected under the scheme, but also for international players like Foxconn and Wistron.
He also wondered about the number of jobs created by this program.
The economist also pointed out that while exports have increased significantly, they were on the rise even before the PLI program – the last third of 2019 saw $1.6 billion in exports and $4.4 billion in imports, while in the last third of 2021, exports were $2.7. billion and imports were $5.2 billion. But imports used to trend down, but are now trending up, indicating that PLI is encouraging manufacturers to import parts as long as assembly is done in India, he said.
He acknowledged that the PLI program should not be dismissed, but questioned whether manufacturers would continue to produce even after the program ends. He argued that in a tight budget, the government has to choose and could have done well by allocating those billions of dollars to schooling children who lost out due to COVID-19.
He wondered why the producers wouldn’t move to other countries when the program ended. Manufacturers could also continue production, but also require continued tariff protection and subsidies. They could also threaten to fire workers, causing the government to relent for fear of a failed scheme.
Rajan said that if domestic production induced by the LIP does not become globally competitive, it will reduce exports in other sectors. It is also not transparent about which industries will benefit from LIP programs, he added.
“The real problem is that we always try political shortcuts. They are not a substitute for longer-term tasks such as improving investment in human capital, creating a simple but fair land acquisition process, stopping the constant reshuffling of tariffs and taxes, which complicate the investment of producers, and the strengthening of infrastructures. Nevertheless, we are widely deploying the PLI program. Maybe the government should take a break first and first assess if it works? said Rajan.
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