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India’s economy to profit from manufacturing schemes

India PLI led manufacturing
India’s Production-Linked Incentive Schemes are expected to give the economy a big boost.

India received an upgrade to its growth projection from the World Bank reflecting an improving investment outlook with private investment, particularly manufacturing, as a result of the Production-Linked Incentive (PLI) Scheme. 

In its Global Economic Prospects report, the World Bank said it expects India’s gross domestic product (GDP) to grow by 8.7% in financial year (FY) 2022-23. This would beat emerging market peers including China (5.1%), Indonesia (5.2%) and Bangladesh (6.4%), said the World Bank.

For FY 2023-24 the bank expects a 6.8% for India, while its forecast for FY 2021-2022 remained unchanged at 8.3%. 

To boost production and exports, the Indian government has launched the PLI scheme. Prime Minister Narendra Modi claimed that the incentive scheme would boost the country’s production by $520 bn in the next five years. 

According to industry forecasts, the schemes could add 1.7% to India’s GDP by 2027. “They could add a substantial 0.3% to annual GDP growth between 2023 and 2027”, asset management company BNP Paribas estimates. 

As per the company, “The PLI scheme is a significant turn in India’s industrial policy: linking incentives to output should encourage scale and specialisation. Also, the scheme is largely compliant with the World Trade Organisation (WTO) norms, unlike earlier export-oriented incentives.”

BNP Paribas also pointed out the opportunity for India to fill the market gap left by China from its supply chain issues and trade war with the US. It recognized Modi’s vision of a self-reliant India as a step toward capitalizing on this chance. The firm also mentioned that the PLI schemes could create approximately 2.8 million new jobs and $28 bn in capital spending.

However, according to investment bank Credit Suisse, “progress in PLI schemes has been slower than expected, possibly due to global supply-chain disruptions and the multiple Covid-19 waves.”

But trends are encouraging, according to Credit Suisse, with most large schemes, including electronics, now in the execution stage, reducing the risk of further delays. However, autos and apparel are still not in progress.

“As exports pick up again, either due to the impact of PLI schemes or otherwise, they could boost GDP by 2.4% in five years”, according to January market resaerch from Credit Suisse.

India’s PLI Scheme

The PLI Scheme was first launched in March 2020 for pharmaceuticals, medical devices, and electronics manufacturing. It has since expanded to 13 sectors, including textile products, food products, and automotive. Each PLI scheme will last between four to six years, depending on the sector. The government has allotted a total budget of $26.48 bn for the program.

The scheme was created to enable the Asian economy to boost its manufacturing potential in the near term. Its objectives are the establishment of large-scale manufacturing capacity, import substitution and exports increase, and job creation.

The PLI scheme is also geared towards the domestic production of goods to reduce India’s reliance on imports in the short term and boost Indian exports in the long term. Building large-scale factories will require a large number of workers so the scheme is also designed to utilize the country’s huge labour force and promote technical education and upgrade of skills. 

According to Ekta Gala, Fund Manager at Mirae Asset, India, the “manufacturing segment has potential to become the next growth driver for India, backed by strong government initiatives like PLI and Make in India.”

In its upcoming budget 2022, the Indian government is reportedly expected to launch PLI schemes in new sectors like electrolysers, power sector, transformer equipment manufacturing as well as solar photovoltaic (PV) modules.