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Measures needed beyond the PLI Scheme

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September 21, 2022

Why in news?

Production Linked Incentive Scheme (PLI) have been floated by the government to encourage capital investment for a higher output but the capital formation rate has moved rather sluggishly.

What is PLI Scheme?

  • In the Union Budget 2021-22, the government has committed nearly Rs.1.97 lakh crore to create manufacturing global champions for an Atma Nirbhar Bharat.
  • Aim- To create national manufacturing champions and to create 60 lakh new jobs and an additional production of 30 lakh crore during next 5 years.
  • For target segments, the scheme provides incentive of 4% to 6% on incremental sales over the base year for goods manufactured in India.
  • The incentive is a kind of subsidy provided to the sector based on the disadvantage or disability faced by the sector.
  • Objectives
    • Make domestic manufacturing competitive and efficient
    • Create economies of scale
    • Make India part of global supply chain
    • Attract investment in core manufacturing and cutting edge technology
    • Competitive manufacturing would in turn lift the exports

plischeme

What is the current issue?

  • Despite promoting schemes such as PLI, the capital formation rate has moved rather sluggishly to 29.2%, which is well below levels of 36.1% seen in FY12.
  • Structure of capital formation in the economy- It is essential to know which sector or institution provides the impetus.
  • Consumption- Consumption needs to be increased to induce industry to invest more.

How about the investment pattern in India?

  • Household sector- Private consumption accounts for 55% of all GDP and is the biggest engine of growth.
  • In FY21, the biggest contributor was the household sector with a share of 39%.
  • Of this, 25.4% was in houses and 13.4% was accounted for by plant and machinery.
  • Therefore, it is necessary for individuals to buy more homes to drive investments.
  • SMEs- The plant and machinery emanating from the household sector is the investment made by SMEs.
  • Many Small and Medium Enterprises (SMEs) have been in the process of recovering and several units were closed down due to lockdowns.
  • Private non-financial corporate sector- The investments made by businesses is the second biggest engine of GDP growth, accounting for 33% of all GDP.
  • The main challenge here is that companies will invest provided there is demand.
  • Government expenditure- Government contributes a share of around 16% mostly to the construction sector that gets reflected in roads and urban development.
  • The challenge here is that the States are grappling with fiscal constraints that often lead to cut back on capex spending to ensure fiscal deficit targets are not breached.
  • Several of the Public Sector Units (PSUs) are either in the distress of regulation (Oil) or under financial strain (Discoms) or just being unviable and waiting to be disinvested.
  • Economic sectors- Looking from the point of view of economic sectors that contribute to investment, the dominant sector here is real estate followed by manufacturing.
  • Hence, the PLI is just one segment of the economy.

What is the way forward?

  • Going beyond PLI- The investment needs to go beyond the PLI which pertains to manufacturing to address challenges in terms of demand.
  • When demand is stagnant, there is less inducement to invest as there is a cost of capital as well as cost of holding inventory involved.
  • Addressing the key issues- The jobs have not been created commensurate with economic growth, which was an issue even before the pandemic.
  • High inflation in some of the key consumption segments has militated against demand.
  • For investment to increase on a large scale, consumption too should be rising at a smart pace.
  • There is a need to look at all sectors when providing incentives, and not just manufacturing.

 

References

  1. https://www.thehindubusinessline.com/opinion/plis-alone-cant-spur-investment/article65915353.ece
  2. https://economictimes.indiatimes.com/news/economy/policy/global-ambitions-all-about-the-production-linked-incentive-scheme/articleshow/79182428.cms?from=mdr
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