A Subsidy-Tariff-Permit Raj?

Context: While the Production-Linked Incentive (PLI) schemes are aimed at boosting manufacturing production in chosen sectors, they are also marred with issues.

Features of PLI Schemes:

• Goal: to boost manufacturing in chosen sectors, both for domestic and export markets.
• Chosen Sectors: Mobile handsets, automobiles and auto components, advanced electrical batteries, pharmaceutical products, personal computers and laptops, air conditioners, telecom equipment and specified processed food products.
• Subsidy cost is borne by the government: In tariffs, the “subsidy” cost is borne by consumers and user industries; thus potential exports get disfavoured compared to import-substitution.

Advantages of PLI subsidies over tariffs:

• Transparently borne by the government: whereas in tariffs, the “subsidy” cost is borne by consumers and user industries; thus potential exports get disfavoured compared to import-substitution.
• Performance-linked: The firms only get paid when the incremental sales occur.
• Non-discriminative: between production for import substitution versus exports.
• The fiscal cost can be capped: It was Rs 40,000 crore over five years for mobiles and specified electronic components, and about Rs 145,000 crore for the ten new sub-sectors.
• Subsidies are for limited periods: for each beneficiary enterprise (for e.g. five years for mobile handset).
• Tailor-made and administered by the concerned ministry: For e.g. Ministry of Electronics and Information Technology, in the case of mobiles) and its designated Project Management Agency (PMA).

Problems associated with PLI schemes:

• Fiscal cost is not trivial: Capping becomes difficult when the number of qualifying firms and incremental production is substantial in a particular sub-sector.
• Bias towards some sub-sectors: Sector-specific tariffs generates favouritism.
  • A particular sub-sector can be the beneficiary of both relatively transparent PLI subsidies and more opaque Customs duty benefits.
• Inadequate Tracking Mechanisms: Accuracy with which incremental production and sales can be gauged is unknown
• Degeneration into subsidy-permit raj: If each PLI scheme is run by different ministries, it is easy to envisage a growing and hydra-headed bureaucracy impacting the quality of implementation.
• No major positive impacts on manufacturing sector: related to long-term productivity and competitiveness.
• Against Free Trade Agreements (FTAs): It will make it harder for India to enter regional FTAs such as the Regional Comprehensive Economic Partnership (RCEP).

Conclusion: Government should ensure maximum feasible transparency, automaticity, uniformity and accountability in the design and implementation of the PLI schemes.