Diversify to Differentiate Think India, Think Next! India: Key Economic Reforms & Production Linked Incentive (PLI) Schemes

In this webinar, various economic reforms introduced by the Government of India with an emphasis on Production Linked Incentives are discussed.

What global trends have arisen due to pandemic?

As COVID-19 has hit every country, some major resultant trends include:

• US and China are likely to achieve above pre-covid GDP as other nations catch up
• Fall in consumption of services due to lockdowns
• Increase in household savings due to precautionary mindset
• A sharp increase in spending for 2021-2022 led by the US
• Fiscal stimulus by the US has led to income boost that will drive consumption and support trade-dependent economies
• For the fed, the focus is on whether PCE overshoots the 2% mark consistently

How are the trends forming in India due to the COVID- 19 pandemic?

As the second wave shows a downward trend and lockdown restrictions open, the economic activities recover. The major trends include:

COVID cases

• The spread of infections in rural areas is of huge concern, though a negative impact on the agricultural sector isn’t expected
• Major cases being across Tamil Nadu, Maharashtra, Kerala who contribute ~35% to the GDP
• India aims to vaccinate 75% of its population (first dose) by April 2022
• Indian plans to import vaccines and increase production capacity to 5 Mn doses/day to meet the targets

Growth

• Increase in GST collections
• Drop-in vehicle sales have shown an uptick as restrictions ease
• The unstable unemployment rate, peak power demand, and rail freight revenues
• Agricultural and allied sectors saw a growth of 3.6% YoY
• Due to the second wave and state-wide lockdown, FY 2022 is expected to have a 9-9.5% growth rate, and no nationwide lockdown has reduced the negative impact
• Disparities in sector-wise growth are expected as tourism, restaurants, etc. continue to struggle to operate
• Government-led construction will play a key role in growth with rising tenders and better performance of cement, steel industries

Inflation

• Core inflation has spiked to 6.55%
• Due to the rise in prices of manufactured products and fuel, the wholesale price-based inflation got elevated to 12.94% YoY in May 2021 v/s 10.49 % YoY in April
• Global food inflation and demand revival as lockdown restrictions ease will affect inflation
• Due to a good monsoon this year, food prices will get tempered

RBI Policy

• RBI has downgraded its growth projections for FY 2022, raised inflation projections which are unlikely to affect monetary policy decision making
• Additional support for stressed sectors by providing liquidity

Fiscal

• Fiscal slippage as expenditure commitments rise for the government to provide support
• Costs for free food and vaccines overshoot the budget
• The continued shortfall for disinvestments this year

Exports

• Due to global economic recovery and vaccination progress, exports have shown resilience and uptick, especially among our trading partners
• Pre-pandemic growth levels surpassed across petroleum, engineered goods, drugs, etc.
• Growth in the US and China is likely to have a good impact on exports from India
• Since most exporters are MSMEs, a growth indicates recovery of MSMEs who struggled during the pandemic

FDI

• USD 90 billion worth FDI
• Focus on removing barriers for businesses has improved ease of doing business rankings for India
• Decrease in FDI due to the second wave, but irregularity is not expected for 2022

WWhat are the initiatives and incentives by the Government of India?

India has grown itself to be a favorable destination for FDI with a growth of 10% as the world looks to diversify its manufacturing and supply chain to reduce its dependency on a single country. Policy reforms have supported the manufacturing sector leading to steady growth towards self-sustenance for India under Atmanirbhar Bharat.

All schemes and initiatives are mutually exclusive that can be availed as per eligibility.

“Atmanirbhar Bharat was not meant to promote isolation by erecting trade barriers, but the idea is to make India’s economy robust in the long run by scaling up manufacturing, accelerating infrastructure development, attracting investments, and promoting consumption-led groups.” - Manik Abbott | Director – Strategic Initiatives | Nexdigm

Initiatives

• Development Finance Institution: to set up the flow of long term funds for infrastructure projects that is a key focus sector
• Mega Permission charter: A single application window for multiple approvals and clearances to speed up the process
• Digital India: the aim is to provide secure digital infrastructure and services that connect individuals, organizations, and companies across the country. Ex. BHIM, UPI, DigiLocker, etc.
• National Health Mission: make healthcare available, accessible and affordable for the economically weaker sections of our country

Incentives

Since India follows a federal system of governance, the incentives are twofold as per Central and State Governments.

Central Government incentives

• Incentives under the Central Government are for promoting industry, specific products, or exports from India
• Upfront capital subsidy of up to 50% of the project cost across select sectors is provided that are linked for production or technological enhancements
• Companies can import capital goods without payment of any import duty

State Government incentives

• Subsidy on electricity, stamp duty, water, employment generation, etc
• Gross GST on sales
• Interest subsidy on term loans

What is the PLI Scheme?

PLI (Production Linked Incentives) is like a subsidy on sale, aiming to impact select sectors to boost India’s local manufacturing. These schemes are WTO (World Trade Organization) compliant and will influence exports via local value addition.

Its key objectives include:

• Making India a global manufacturing hub
• Promoting strategic sectors that have growth and employment potential
• Import substitution
• Innovation and local value addition by building IP

Impact by PLI scheme

• USD 26 billion worth incentives to be used across 5-7 years tenure across 13 sectors
• Minimum production of USD 500 billion worth of goods is expected
• 2 million direct jobs creation
• Incentives of 4-10% are expected based on investments and incremental sales

The PLI scheme applicability, eligibility across various sectors is as follows:

PLI - Telecom and Networking Sector

• Aims to evolve equipment and latest technology adoption across IoT, 5G, etc.
• 4-7% incentives for MSMEs with a financial outlay of USD 1.63 billion
• Minimum investment - USD 1 million

PLI - White Goods

• The aim is to create a robust component manufacturing for LEDs, Air Conditioners, etc that are expected to grow by 10%
• 4-6% of incremental sales with a financial outlay of USD 840 million

PLI - Pharmaceuticals

• The aim is to improve manufacturing for biopharma, active pharma ingredients, etc.
• 6-10% of incentives based on the turnover of the applicant with a financial outlay of USD 2 billion

PLI - Solar PV Modules

• India aims to install 450 GW capacity of renewable energy by 2030, for which 25 GW of solar energy capacity is needed every year
• The scheme aims to reduce the dependency on importing solar PV cells and grow manufacturing capacity within India
• - 2.25% - 3.75% incentives based on temperature coefficient matrix with financial outlay of USD 600 million

PLI schemes that are notified and closed are provided in the webinar video for reference.