The Indian government recently signed off on a Production Linked Incentive (PLI) scheme to encourage local and foreign enterprises to invest in India’s manufacturing sector.
India has become a hub for back-office services and a growing manufacturing base. As a nation, India offers a wealth of perks for manufacturers, such as an educated and hard-working population, reasonable prices for factory grounds and tax reductions for smaller manufacturers.
Given its large population, India has ambitions to get people out of poverty by offering support to help them improve their standard of life. The goal is to achieve the same success with the PLI scheme, and present India as a solid choice for manufacturers to set up their factories and boost the country’s economic growth.
The PLI scheme, where the government will distribute $20 billion USD amongst eligible manufacturers, aims to remunerate manufacturers for increasing total manufacturing output and reward them for increasing the production of key goods in India.
For example, if a company manufactures 1000 units in India on an annual basis then increases to 2000 units, the government will issue an incentive for the additional 1000 units. Previous incentive schemes have provided between 2-6% of sales depending on the sector and size of the factory. As a result, these manufacturers could either produce more for the Indian market or produce in India to export to other countries.
Many mobile phone manufacturers, including Foxconn, Pegatron and Apple already manufacture their products in India. In just two years, India has become the second-largest mobile phone manufacturer (after China), as well as one of the largest pharmaceutical manufacturers in the world.
Similar schemes for mobile phone/electronic manufacturers and pharma companies have already yielded significant investments in the respective sectors. The hope is to create the same manufacturing foothold in other sectors by inspiring more companies to set up shop in Indian factories.
The PLI scheme’s main benefit is that it’ll help foreign companies expand into India, or expand their existing manufacturing facilities in the country. Every new unit these manufacturers produce will earn them an incentive from the Indian government, which will help them to expand their operations further.
Providing a more extensive manufacturing base will also benefit the local population as larger factories require more staff. The incentive scheme will create more job opportunities and more economic activity, which will hopefully aid in reducing poverty in India.
The PLI scheme provides a win-win situation for India and for companies looking to expand.
To qualify for the PLI scheme, manufacturers must meet specific criteria, including an investment threshold that will likely rule out smaller manufacturers. The government will release the details at a later date.
The eligible sectors are:
- Automobiles & components
- ACC batteries
- Telecom products
- Steel products
- Food processing
- White goods
- Solar PV
The eligible product lines have been covered in detail here.
How Long Will the PLI Scheme Last?
At present, the PLI scheme is set to last for three to four years for most sectors, and five years for the telecom sector. Over time, the government will review the progress of the scheme and make changes as necessary based on how well it performs.
Options for Smaller Manufacturers
For those who can’t pay the minimum investment fee, India has an excellent tax system. In October 2019, the Indian government reduced the tax rate for new manufacturing companies to 17%, as compared to 25% for other companies.
This is one of the lowest tax rates in Asia, which makes India a winning choice even for new and smaller manufacturers. Also, by paying less tax, these manufacturers have a more substantial chance at expanding and making enough money to join the PLI scheme to reap its benefits eventually.