Several Production-Linked Incentive (PLI) schemes have been announced by the Government to reduce dependence on imports and encourage self-reliance. Schemes have already been announced in the pharmaceutical sector; specifically for pharmaceutical manufacturing and medical device manufacturing sectors. Another PLI scheme has been announced for large scale electronics manufacturing and manufacturing of electronic components.
PLI schemes provide incentives in the form of a direct cash benefit. Not to be confused with subsidies, which are provided before a firm undertakes operations, incentives under PLI are provided after the companies fulfill their minimum threshold of incremental investments and incremental sales revenue.
All the PLI schemes highlight one factor to qualify for eligibility: Greenfield Investment. The firms, to become eligible for incentives, will have to either set up new facilities or expand existing ones.
The Empowered Committee chaired by Niti Aayog CEO is the Force Majeure authority for PLI schemes and retains the responsibility to review the performance of the schemes. The EC composed of Secy. Economic Affairs, Secy. Expenditure, Secy. MeitY, Secy. Revenue, Secy, DPIIT (Department For Promotion Of Industry Internal Trade), and DGFT (Directorate General Of Foreign Trade) have significant powers with regards to approval and examination of applications and scheme mechanics.
Sectors currently permitted under the PLI scheme
Source: Tavaga Research
PLI scheme for Large Scale Electronics and Components Manufacturing
The target segment for the scheme is limited to mobile phones and certain specified electronic components. However, the segment for mobile phones is categorized into mobile phones with an invoice value of Rs 15,000 and above and mobile phones manufactured by domestic companies.
Incremental investment over the base year is defined at a minimum level of Rs 1,000 crores over four years for large scale electronics manufacturing. The incremental sales of manufactured goods over the tenure of the scheme have to be a cumulative minimum of Rs 25,000 crores. The similar threshold for domestic companies is lower with incremental investment and incremental sales over the base year at Rs 200 crores and Rs 5,000 crores. Electronic components attract an even lower threshold for investment and sales to meet eligibility criteria. FY 2019-20 has to be considered as the base year for all the schemes.
Incentives of 4 percent to 6 percent will be provided on incremental sales of goods manufacturing domestically. For the components manufacturing scheme, 25 percent of capital expenditure on greenfield investments and R&D costs will be reimbursed.
Incentive outlays have been capped for each year over the tenure. The necessary condition for eligibility is that only domestic companies or companies with units registered in India will be able to access the scheme.
The Government has already approved applications by international manufacturers such as Samsung (KS: 005930 ), Foxconn, Pegatron, Rising Star, and Wistron. Local companies such as Lava and Micromax have also been approved under the scheme. The approval count stands at 16 for electronics manufacturing and 6 for components manufacturing.
The estimated production will have a monetary value of Rs 10.5 lakh crores with around 60 percent reserved for exports. The PLI scheme is estimated to yield tax revenues to an extent of Rs 80,000 crores over the tenure of the scheme. 90 percent of the tax revenues are estimated to arise in the form of GST and the remainder is to be attributed to corporate tax, income tax, and miscellaneous receipts.
PLI scheme for Pharmaceuticals and Medical Devices Manufacturing
The PLI scheme introduced for pharmaceuticals manufacturing is designed to benefit domestic manufacturing and production of:
- Key Starting Materials (KSM)
- Drug Intermediaries (DI)
- Active Pharmaceutical Ingredients (API)
41 products have been listed that make the cut for gaining incentives. The products are categorized into fermentation-based products and chemically synthesized products. The incentive rates differ for both the product categories.
The selection criteria are similar to that of the electronic devices scheme. The investment has to be a greenfield project. Additionally, the net worth of the applicant cannot be lower than 30 percent of the total capital committed to the scheme. The scheme also poses a Domestic Value Added (DVA) criteria. DVA factors in the sales generated as a result of using material and services originating in India. DVA is supposed to meet 90 percent for fermentation-based products and 70 percent for chemically synthesized products.
The incentive eligibility requires an applicant to meet the criteria for:
- Committed investment
- Minimum annual production capacity
- Achievement of stipulated DVA
The investment in land and buildings (barring certain specified facilities) will not be considered as an eligible investment under the scheme.
Incentives will be provided at 20 percent during FY 2022-26, 15 percent during FY 2026-27, and 5 percent during FY 2027-28 for fermentation-based products. Chemically synthesized products will attract a uniform incentive rate of 10 percent.
The target segments for the Medical Device manufacturing scheme are products ranging from capital equipment and implants to consumables. Incentives will be provided at the rate of 5 percent on incremental sales over the base year.
Following feedback from the pharma industry, the PLI scheme was revised to offer the following guidelines:
- Instead of a minimum threshold for investment, the scheme specifies committed investment as a deciding factor for eligibility. The reason for such a change in terminology is to account for the plethora of technology options available for different products.
- The guideline to restrict the sales of manufactured products only to domestic markets was deleted. The scheme is now in line with other PLIs allowing the export of manufactured products.
- The minimum annual production capacity for 10 products was also revised.
The way forward
NITI Aayog’s Vice Chairman confirmed that India can expect PLI schemes for at least nine to ten sectors in the coming future. While the sectors have not been identified yet, the VC did drop a hint by mentioning the Government’s plans in the electric mobility sector. Given PM Modi’s affinity toward green energy, the economy can surely expect incentives in the sector.
The most recent announcement, however, was for introducing a PLI scheme for the domestic manufacturing of agro-chemicals. The Minister of State for Chemicals and Fertilizers has confirmed that the scheme is being deliberated upon.
The schemes serve a greater agenda by not only creating the market for specified products but also providing employment at a mass level and generating revenue for the Government in the form of higher tax revenues. The PLI schemes also serve a dual purpose of bringing in higher foreign direct investment (FDI) while enabling domestic manufacturers to expand production capabilities.
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