Five questions India needs to answer about its PLI scheme

For a fuller understanding of how India’s manufacturing push will reshape India, the country need to think about these five aspects of PLI 

India is trying to become a manufacturing powerhouse in a clutch of old and new sectors. Its policy instrument, the production-linked incentive (PLI) scheme, stands on a mix of old and new pillars—high import tariffs to coax companies to stop importing and source in India instead; a focus on creating a few champions in each sector where India wants global competitive advantage; an interim disability cost paid out by the government to these firms to offset the inefficiencies of manufacturing in India; and maximal localisation in each value chain to reduce dependence on other countries.

Two years into its launch, how is the scheme doing? The government is bullish. On Independence Day this year, Prime Minister Narendra Modi said India is becoming a manufacturing hub. According to The Economic Times, the scheme has generated investment commitments of Rs2.34 lakh crore (US$ 29.35 billion) across 14 sectors. Critics are less sanguine. India has tried in the past to boost domestic production by erecting import barriers. The outcome wasn’t pretty. Indian firms lobbied the government for prolonged subsidies and import barriers, and sold expensive products priced just below imports. Overall efficiency fell. India seems to be slipping down the same slope again.

As we saw with the polysilicon and battery PLIs, some aspects of the scheme weaken the country’s chances of dominating these sectors. In the third—and concluding—part of this series, CarbonCopy raises five questions about the PLI scheme. India’s inroads into global manufacturing chains, not to mention the future direction of these sectors in India, sizeably depend on how the country addresses each of these issues. 

Is India choosing sectoral champions well?

While new to India, the sectoral champion approach is not an untested one. 

Countries like China, Japan and Korea, too, groomed a handful of firms to world-beating scale. With the PLI scheme, India’s BJP-led NDA government is trying to replicate this success. Just four companies bagged the solar PLI. Three won the battery PLI. 

The idea comes with promise and peril. Done right, India will have a new generation of firms exporting to the world. As an infrastructure-sector watcher told CarbonCopy, “Imagine finding ten Dhirubhais!” Back the wrong firms, however, and the country loses the chance to dominate the industries of the future. 

This is a real concern. As the second part of this series showed, India is struggling to identify sectoral winners. In the advanced chemical cell (battery) PLI, newcomers bagged PLIs by promising large manufacturing scale or high localisation, while more established firms made more cautious commitments and were left out. 

RE sector watchers are also worried about PLI support flowing to a few conglomerates. Reliance has won in both the solar and battery PLIs. Adani has won only in solar—but has an investor in common with Rajesh Exports. “Adani is now active in battery, cell, solar module, gas, LNG, city gas, thermal, solar, hydrogen, ports and refineries,” said a RE industry veteran in Hyderabad. “Why are we not supporting new companies in each of these verticals?” 

How significant is PLI support?

Another oddity emerged from the battery PLI. 

The government eventually chose three companies—Rajesh Exports, Ola Electric and Reliance New Energy Solar. Amara Raja and Exide, however, said they will continue working on advanced chemical cell batteries, even without PLI support. 

“These companies will not walk away from the future of their business,” said Rahul Walawalkar, the head of India Energy Storage Alliance (IESA), an advocacy organisation for companies working on advanced energy storage, green hydrogen and e-mobility technologies in India.

Their decision to continue, however, raises a question about the size of PLI support. It, clearly, is not significant enough to render other companies in these sectors uncompetitive. A senior executive in a firm that won the solar PLI agreed. “At the most, it takes care of 8-11% of my project cost. Can that determine whether rivals will invest? No.” The executive didn’t want to be identified.

This raises a fresh question. How much money is India putting into its bid to dominate the industries of the future? The numbers are underwhelming. With the PLI scheme, India is pouring Rs1.97 lakh crore ($24.71 billion) into 14 sectors, which works out to Rs16,000 crore per sector. 

India’s biggest financial incentive is for semiconductors—Rs76,000 crore (~$10 billion). To put that in perspective, the US has pushed a $280 billion bill for semiconductors. Or take China. The country is spending $700 billion annually on its industrial policy aims.

In contrast, apart from semiconductors, India is spending Rs1.97 lakh crore ($25 billion, over five years). Some of this is unsurprising. The US and China are larger economies. But India has to shoulder a part of the blame as well. PLI started off with a focus on critical sectors, but subsequently lost that focus. 

This expansion, which took even bureaucrats working on PLI by surprise, can be traced back to the RSS’ Swadeshi Jagran Manch. “A lot of sectors are very affected by dumping in India,” said Ashwani Mahajan, the national convenor of the body. 

When CarbonCopy met him, former finance secretary Subhash Chandra Garg warned against expanding PLI to many sectors. “It is necessary to focus on a few key sectors rather than frittering away limited resources in too many non-critical industries,” said Garg, who is also the author of The $10 Trillion Dream: The State of the Indian Economy and the Policy Reforms Agenda. “What are these new-age industries where you want to create competitive advantage? Semiconductors, Photovoltaics and (ACC) Batteries are fundamental to our growth. The few critical new-age industries must expand.”

Can a firm dominate an entire value chain?

India’s PLI scheme aims not only to create sectoral champions, but also indigenise entire value chains. This comes with its own bottlenecks. To make polysilicon, India needs metallurgical silica. To make cells, India needs cathode, anode, separator and electrolyte.

Who will make these, asked the Hyderabad-based consultant. “Those ecosystems are not in India either,” he said. “Creating them will call for further investment. This needs huge capital as well—especially if we are talking about exporting to the world. If the same firm making polysilicon or cells has to make these, will it be competitive against firms that only make these?”

There are two problems here. The first is complexity. “It’s futile to indigenise an entire value chain,” said Pranay Kotasthane, who researches high-tech geopolitics at Bangalore’s Takshashila Institute. “These supply chains are just too complex. Intel has 16,000 suppliers. How do you replicate that here?” The second is scale. Firms like Daqo Solar, focusing only on a single rung in these value chains, have built immense scale. Can a single, vertically integrated firm with limited state support compete with those? 

As industrialist Naushad Forbes wrote in Business Standard: “Poclain of France licensed the technology to produce hydraulic excavators to L&T in 1973 and Hyundai in 1974. In 1983, the Korean firm made 630 excavators to L&T’s 70. Korean excavators sold for 125% of the world price; L&T’s sold for three times the world price. It was not for want of trying or technical effort… Indian government policy in the 1970s forced indigenisation above all else: L&T’s excavators had a domestic content of 70-80%, to 40-60% in Korea. An excessive focus on indigenisation led directly to a lack of competitiveness.”

Can import-substitution result in export competitiveness?

What India is trying, said Kotasthane, is phased manufacturing. To get firms to go beyond assembling in the country, it’s erecting tariff barriers for components, making local sourcing of components more attractive. This approach, however, assumes that import substitution will result in export competitiveness. If that doesn’t happen, India will find itself saddled with expensive, locally sourced inputs priced marginally below imports. 

Take solar. India wants to produce its own polysilicon. And therefore, it has hiked import tariffs to make locally-made modules more attractive.

A solar industry executive CarbonCopy spoke to last year was doubtful if localisation would yield export competitiveness. “In the next 12-18 months, the basic Customs duty on fully integrated modules will go up to 40%,” he said. “For imported cells, this will go up by 25%. Once you add taxes like GST, this increase will be close to 50%.” Similar hikes, he said, have been slapped on the import of borosil glass, first from China and now Malaysia. 

According to him, a hike in domestic prices was likely. “Domestic players will hike their prices to match these rates and the absorption of new modules will slow. My industry peers think India will, for the coming years, add a steady 6-8 GW of fresh capacity each year. Elasticity of prices would have pushed this number higher but that won’t happen now.”

The costs run deep. As of now, at least 25 GW of solar power projects face delays or uncertainties due to an increase in module prices. There are also longer-term costs. India wants to export green hydrogen. To be competitive, it will need cheap solar power. Our modules, however, are getting costlier. This is a point with wider applicability. If locally manufactured semiconductors are not globally cost-competitive, they will reduce the export competitiveness of products using these. 

It would be better, said a recent ICRIER report on the electronics sector, to globalise first and then use that scale to replace imports. Trying to achieve both simultaneously, it said, is unlikely to succeed without a “competitive domestic ecosystem of ancillary suppliers”. The sector, said the report, should source “inputs from the lowest cost suppliers anywhere in the world until it achieves a global scale, which implies temporarily suspending localisation requirements, removing duties on intermediate items, and accelerating integration through bilateral and regional FTAs.”

Could India have used this money better?

Decarbonisation, as CarbonCopy has written earlier, is a chance for India to build fresh competitive advantages.

As Garg said, the country should have focused on a few sectors. Within these, it shouldn’t have tried to indigenise entire value chains. Instead, as Kotasthane told CarbonCopy, India should have taken a two-pronged measure. In sectors where the country is entirely reliant on China, it needs to find alternatives to either the technology or find fresh suppliers. Second, India should focus on value chain rungs it can dominate. “Ninety percent of all chips made in the world have some design work done in India. We should double down on the incentives there,” he said. 

There is something odd here. Despite wanting to create the technological players of tomorrow, India’s PLI programme doesn’t lay much emphasis on creating fresh technology. The onus of developing the technology has been left to the companies—which can either produce it in-house or acquire it. 

Can a country build sustainable competitive advantage in these critical sectors without investing in long-term fundamental research? 

As things stand, PLI’s selection parameters work against firms doing R&D. In the battery PLI, one of the parameters is speed—or ‘time to production’. “Speed means I cannot pick up long-duration research on alternatives,” said a manager at Ola Mobility Institute. “I can only work on existing technologies that can be quickly brought to market. This is very different from the CSIR type of fundamental research.”

CarbonCopy asked scientist VK Saraswat, who is now a NITI Aayog member, for a meeting to discuss the government’s thinking on this question. He declined to meet. 

Endgame

We are back to the question this series started with. How is India’s PLI programme doing?

The world indeed stands at a cusp. Countries are seeking alternative manufacturing bases to China. India is well-placed to capitalise on this shift. “If we produce a quality product, we can create an alternative to China,” a senior manager in a firm, which has bagged the solar PLI, told CarbonCopy. “The world badly wants an alternative to China and there is no other country that can work at a similar scale.”

Is the PLI scheme aiding—or hindering—India’s chances? In sectors like cell phones, global giants like Foxconn have agreed to start manufacturing in India. In batteries, the total capacity announced by companies is twice what the PLI scheme had planned for. “The eventual number stood at 130 GwH and now industry is anticipating India to have almost double the ACC PLI manufacturing capacity (100 GWH) by 2027-28,” said Walawalkar.

And yet, questions persist. Take the companies which have bagged PLI support. Will they become globally competitive by the time disability cost payments cease? For that to happen, they will have to add enough scale to absorb the inefficiencies of manufacturing in India—and stay competitive. 

As Naushad Forbes wrote: “No company should have any doubt about the duration of the scheme; it runs for five years and there will be no extension. Accompany that with a graded reduction in all tariffs on the finished product and the components going into it—such that come 2025, all these products must be able to compete without protection. Hopefully, PLI will have worked in developing deeper, and so more competitive, supply chains. But competing with the best in the world, at home and abroad, must be our sole metric for whether PLI has worked.”

Or take the companies which are scaling up despite not bagging PLI. Supported by import tariff extensions, will these focus on exports or the domestic market? 

In the meantime, the scheme is affecting sectoral dynamics. The pharma sector is home to thousands of companies, but just 70-odd firms have received PLI support. That was just the start. “Up to four companies were to receive approval to produce a raw material,” wrote industry website ThePharmaNewsletter. “Data from the government, however, shows that for more than 20 products, only one firm has been selected per product.” 

With these firms getting an incentive from the government, said the newsletter, not only will other manufacturers making the same molecule struggle, drug-makers will be dependent on just one manufacturer for that particular molecule. 

Could this Rs1.97 lakh crore have been better used? Perhaps, as Forbes wrote, to focus on boosting India’s manufacturing competitiveness rather than on focusing on a few firms? Or, as Kotasthane said, to capture rungs in value chains where India already has competitive advantage? Or, perhaps, just to focus on strengthening the country’s indigenous research capacities? What we are doing, however, is selling off the country’s scientific research bodies—like Central Electronics.

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M Rajshekhar

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