SIMPLY PUT: Watch out for production linked incentives in the budget⁠ — here’s how it will work

• The Production-Linked Incentive scheme was introduced by the central government in March 2020.
• The scheme provides an incentive of 4-6% to eligible companies on sales of goods manufactured in India for a period of five years.
• Domestic brokerage house Sharekhan by BNP Paribas estimates that the scheme may add $520 Billion to India’s GDP over the next five years.

The Production-Linked Incentive (PLI) scheme was introduced by the government to incentivise and boost domestic manufacturing, as well as attract foreign manufacturers to move base to India. The aim of the scheme is to generate more employment and cut down the country’s reliance on imports from other countries.The programme has an allocation worth ₹1.97 lakh crore, with auto industries getting a lion’s share at Rs 57,042 crores over the next five years.

“There is no incentive for setting up a plant, but if your plant starts producing, then there’s an incentive,” says Nilesh Shah, Group President & MD at Kotak Mahindra AMC.

“This is coming at a time when businesses are shifting out of China. While other countries have far better infrastructure, maybe even better ease of doing business, none of them have a large market like India.”


The PLI scheme, initially, only covered mobile phones and allied equipment, pharmaceutical ingredients and medical devices. Later, in November 2020, Finance Minister Nirmala Sitharaman extended the benefits to 10 more labour intensive sectors.


“The PLI scheme has been structured well, learning from the textile upgradation fund,” adds Nilesh Shah. “It is coming at the right time. If we can create this kind of momentum, then growth will automatically happen. I feel that the PLI scheme could add a percentage point to India’s GDP over a period of time.”

According to the Ministry of Electronics and Information Technology, Samsung, Foxconn Hon Hai, Winstron, and Pegatron are among the international manufacturers approved for incentives under the PLI scheme. The latter manufacture components for Apple devices.

Domestic players such as Lava and Micromax have also been approved. In the upcoming budget session, brokerage house Angel Broking expects the government to expand the scheme to more sectors like footwear, chemicals, and agrochemicals.

There are others who want the period for production-linked incentives to be increased in the sectors where it is already applicable. “A five-year incentive scheme is not enough and the Government should commit 10 years and accordingly, the incentive scheme should be expanded,” Shashi Mathews, partner at Induslaw, told Business Insider.

Brickwork Ratings, however, has a harsher stance on the scheme, noting that it will make sectors dependent on subsidies. “The need of the hour is to improve the competitiveness of the economy, which requires exposing domestic players to international competition. An overvalued rupee and increased tariff protection cannot make the economy competitive,” their pre-budget expectations report says.

“There is clearly a need to reverse protectionist trends and to modify the Atmanirbhar campaign to increase competitiveness, rather than erecting protectionist walls.”


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