By Janak Raj
India’s manufacturing sector, with a share of 2.8% of global output in 2022, lags significantly behind giants like China (30.5%), the US (15.6%), and Germany and Japan (around 5-6% each). Despite numerous initiatives by the government, the share of manufacturing, on an average, has hovered around 16% of gross value added (GVA) in the last decade. Alongside initiatives such as National Manufacturing Policy (2011), Make in India (2014), Startup India (2016), and Atmanirbhar Bharat (2020), a major initiative of the central government to boost manufacturing output in India was the production-linked incentive (PLI) scheme.
Introduced in March 2020, the PLI scheme covers 14 sectors aimed at bolstering India’s manufacturing capabilities and generating employment. The scheme envisaged a provision of `1.97 trillion as incentives/subsidies ranging from 4-6% on incremental sales for a period of 5-6 years over the base year. The scheme was meant to offset some of the disadvantages faced by the Indian manufacturing sector such as high logistics costs due to inadequate infrastructure, high cost of capital, stringent labour laws, inadequate access to power, and skill gaps.
Also Read Bumps on the road: New BoT terms for highway construction may throw pvt investors into risk-aversion mode E-commerce needs a bulwark The elephant in RBI’s room The giant has arrived: India’s rise as a global power creates a tightrope of domestic and international aspects The budgeted allocation under the PLI scheme for all sectors aggregated `25,453 crore up to 2024-25; actual disbursements were `10,206 crore (up to 2023-24). The latest data released by the government suggests that the scheme witnessed over `1.03 trillion of investment till November 2023, resulting in production/sales of `8.61 trillion and employment generation (direct and indirect) of over 6.78 lakh. The PLI scheme is reported to have promoted exports surpassing `3.2 trillion. The targets set under the scheme over the five-year period were `2.7 trillion worth of investments, `32 trillion for sales, and 59 lakh jobs. It will, therefore, be a tall order to achieve these targets in the remaining years.
It is, however, not clear whether the reported investments, production, employment, and exports numbers are really exceptional, as these would have grown in any case in the business-as-usual scenario. Therefore, the contribution of the PLI scheme would need to be assessed over and above normal circumstances. In addition, data in some targeted sectors under the scheme would also need to be adjusted to avoid double counting. Some companies covered under the scheme may grow at the expense of micro, small and medium enterprises (MSMEs). Therefore, some additional investments/ employment/sales/ exports under the scheme could be at the expense of MSMEs. Likewise, exports would need to be adjusted for imports used as inputs. Since granular data is not readily available, the analysis of the effectiveness of the scheme can be made only at a macro level.
The share of manufacturing in domestic GVA declined to 14.1% in 2023-24 from 14.7% in 2019-20. India’s share in global manufacturing output also declined to 2.8% in 2022 from 3% in 2017, as against China, whose share increased from 26.1% in 2017 to 30.5% in 2022. According to the periodic labour force survey, the proportion of workers employed in the manufacturing sector increased from 10.9% in 2020-21 to 11.4% in 2022-23.
The PLI scheme may help overcome some of the disadvantages facing Indian manufacturing, but there is no escape from the longer-term challenges facing the sector in India at a systemic level. The experiences of successful countries such as China, the US, Germany, and Japan suggests that manufacturing is determined by a host of factors, particularly, quality of labour force, infrastructure, regulatory environment, and trade policies.
It is encouraging that India has made rapid progress in recent years in some of the key factors that determine manufacturing. India improved its position to 40th rank among 132 economies in the Global Innovation Index 2023 from 81st in 2015. The Logistics Performance Index 2023 by the World Bank placed India 38th out of 139 countries, a sharp improvement from 54th in 2014. Despite these developments, we have a long way to go to make India’s manufacturing globally competitive. Latest estimates (2024) by the International Labour Organization suggest that the output per worker in India was at $20,108 based on 2017 constant gross domestic prices (GDP) in purchasing power parity terms, which was very low as compared with many other major manufacturing countries such as China ($37,548), Japan ($80,185), the UK ($94,772), Germany ($107,131) and the US ($134,766). Low productivity is also reflected in indices such as the World Competitiveness Index (International Institute for Management Development) where India’s ranking slipped by three spots to 40th in 2023. India’s R&D expenditure is low at 0.64% of GDP in 2020-21. This pales in comparison with R&D expenditures (as a percentage of GDP in 2019-20) in China (2.4%), Germany (3.1%), and Japan (3.3%), underscoring a critical gap that India needs to bridge to improve its manufacturing competitiveness on the global stage. Since the quality of the labour force is one of the crucial factors impacting manufacturing capabilities, it is important to invest in vital sectors such as education and healthcare, the public spending on which has remained extremely low; expenditure on education has stagnated at around 2.9% of GDP for nearly a decade, and that on healthcare at 1% of GDP in the last three decades. India’s position at 134th in the Human Development Index for 2022 was behind even neighbouring countries such as Bhutan, Sri Lanka, and Bangladesh. No doubt, India has a huge domestic market; however, if it has to achieve manufacturing on a global scale and integrate into the global value chain effectively, it needs access to other markets for which there is a need to explore free trade agreements.
Overall, a comprehensive strategy is needed aiming not just for physical infrastructure development but also human capital for propelling India’s manufacturing capabilities and establishing it as a manufacturing hub.
Janak Raj, Senior fellow, Centre for Social and Economic Progress (CSEP), New Delhi, Co-authored with Aashi Gupta, research associate, CSEP, Views are personal.
By Janak Raj
India’s manufacturing sector, with a share of 2.8% of global output in 2022, lags significantly behind giants like China (30.5%), the US (15.6%), and Germany and Japan (around 5-6% each). Despite numerous initiatives by the government, the share of manufacturing, on an average, has hovered around 16% of gross value added (GVA) in the last decade. Alongside initiatives such as National Manufacturing Policy (2011), Make in India (2014), Startup India (2016), and Atmanirbhar Bharat (2020), a major initiative of the central government to boost manufacturing output in India was the production-linked incentive (PLI) scheme.
Introduced in March 2020, the PLI scheme covers 14 sectors aimed at bolstering India’s manufacturing capabilities and generating employment. The scheme envisaged a provision of `1.97 trillion as incentives/subsidies ranging from 4-6% on incremental sales for a period of 5-6 years over the base year. The scheme was meant to offset some of the disadvantages faced by the Indian manufacturing sector such as high logistics costs due to inadequate infrastructure, high cost of capital, stringent labour laws, inadequate access to power, and skill gaps.
The budgeted allocation under the PLI scheme for all sectors aggregated `25,453 crore up to 2024-25; actual disbursements were `10,206 crore (up to 2023-24). The latest data released by the government suggests that the scheme witnessed over `1.03 trillion of investment till November 2023, resulting in production/sales of `8.61 trillion and employment generation (direct and indirect) of over 6.78 lakh. The PLI scheme is reported to have promoted exports surpassing `3.2 trillion. The targets set under the scheme over the five-year period were `2.7 trillion worth of investments, `32 trillion for sales, and 59 lakh jobs. It will, therefore, be a tall order to achieve these targets in the remaining years.
It is, however, not clear whether the reported investments, production, employment, and exports numbers are really exceptional, as these would have grown in any case in the business-as-usual scenario. Therefore, the contribution of the PLI scheme would need to be assessed over and above normal circumstances. In addition, data in some targeted sectors under the scheme would also need to be adjusted to avoid double counting. Some companies covered under the scheme may grow at the expense of micro, small and medium enterprises (MSMEs). Therefore, some additional investments/ employment/sales/ exports under the scheme could be at the expense of MSMEs. Likewise, exports would need to be adjusted for imports used as inputs. Since granular data is not readily available, the analysis of the effectiveness of the scheme can be made only at a macro level.
The share of manufacturing in domestic GVA declined to 14.1% in 2023-24 from 14.7% in 2019-20. India’s share in global manufacturing output also declined to 2.8% in 2022 from 3% in 2017, as against China, whose share increased from 26.1% in 2017 to 30.5% in 2022. According to the periodic labour force survey, the proportion of workers employed in the manufacturing sector increased from 10.9% in 2020-21 to 11.4% in 2022-23.
The PLI scheme may help overcome some of the disadvantages facing Indian manufacturing, but there is no escape from the longer-term challenges facing the sector in India at a systemic level. The experiences of successful countries such as China, the US, Germany, and Japan suggests that manufacturing is determined by a host of factors, particularly, quality of labour force, infrastructure, regulatory environment, and trade policies.
It is encouraging that India has made rapid progress in recent years in some of the key factors that determine manufacturing. India improved its position to 40th rank among 132 economies in the Global Innovation Index 2023 from 81st in 2015. The Logistics Performance Index 2023 by the World Bank placed India 38th out of 139 countries, a sharp improvement from 54th in 2014. Despite these developments, we have a long way to go to make India’s manufacturing globally competitive. Latest estimates (2024) by the International Labour Organization suggest that the output per worker in India was at $20,108 based on 2017 constant gross domestic prices (GDP) in purchasing power parity terms, which was very low as compared with many other major manufacturing countries such as China ($37,548), Japan ($80,185), the UK ($94,772), Germany ($107,131) and the US ($134,766). Low productivity is also reflected in indices such as the World Competitiveness Index (International Institute for Management Development) where India’s ranking slipped by three spots to 40th in 2023. India’s R&D expenditure is low at 0.64% of GDP in 2020-21. This pales in comparison with R&D expenditures (as a percentage of GDP in 2019-20) in China (2.4%), Germany (3.1%), and Japan (3.3%), underscoring a critical gap that India needs to bridge to improve its manufacturing competitiveness on the global stage. Since the quality of the labour force is one of the crucial factors impacting manufacturing capabilities, it is important to invest in vital sectors such as education and healthcare, the public spending on which has remained extremely low; expenditure on education has stagnated at around 2.9% of GDP for nearly a decade, and that on healthcare at 1% of GDP in the last three decades. India’s position at 134th in the Human Development Index for 2022 was behind even neighbouring countries such as Bhutan, Sri Lanka, and Bangladesh. No doubt, India has a huge domestic market; however, if it has to achieve manufacturing on a global scale and integrate into the global value chain effectively, it needs access to other markets for which there is a need to explore free trade agreements.
Overall, a comprehensive strategy is needed aiming not just for physical infrastructure development but also human capital for propelling India’s manufacturing capabilities and establishing it as a manufacturing hub.
Janak Raj, Senior fellow, Centre for Social and Economic Progress (CSEP), New Delhi, Co-authored with Aashi Gupta, research associate, CSEP, Views are personal.
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