How PLI is actually taking Indian manufacturing backwards (and what can be done about it)

The future of India’s much-touted Production-Linked Incentive (PLI) scheme is in serious doubt. Despite grand ambitions, the scheme has failed to halt—let alone reverse—the decline in Indian manufacturing. Proponents of the scheme give it credit for recent success in electronics manufacturing, where India has become one of the world’s largest smartphone producers. Acknowledging the scheme’s issues, they ask for it not to be killed but rebooted as PLI 2.0 (or was it 3.0?).

That would be a mistake.

A true accounting of the costs of such schemes tells us that they rarely work and almost never justify their true cost. Two fundamental problems need closer examination: government-directed production and a vicious cycle of dependency and distortion between government and industry.

Whenever government attempts to second-guess the market by directing production towards favoured sectors, caution is warranted. Unlike private businesses, which must rapidly adjust to changing market conditions, governments can continue to funnel money into failed projects. India’s own history underscores how government-directed production frequently underwhelms or fails outright. India’s policy of reserving certain products exclusively for manufacture by small scale industries introduced in 1967 led to stunted growth in job-creating sectors like garments. It took until 2015 for the last set of products to be de-reserved, long after it was clear that the policy had been a failure. This was just one excess of the License Raj era, which tightly controlled what could be produced, in what quantity, and by whom, stifling innovation and hobbling our global competitiveness. PLI is the same wine in a different bottle.

More recently, governments have continued to pick “winners” that ultimately turned into “losers”, with Air India being a prime example. Nationalised in 1953, the carrier’s true cost became apparent after the civil aviation sector was liberalised in 1994. Once private airlines entered the market, Air India—then still under government control—suffered losses continuously from 2007 onwards, leaving taxpayers to foot an 85,000-crore rupees bill. While privatising Air India was the right move, it should never have been under state control in the first place.

Similarly, PLI risks guiding resources to areas chosen by policymakers, rather than letting market forces decide how best to capitalise on India’s strengths. These central directives might indeed prop up manufacturing in certain niches for a while, but there is no guarantee of long-term success if the incentives stop.

This brings us to the second danger of incentives – once they become part of the economic landscape, beneficiary industries have a vested interest in perpetuating and expanding them. Nobel laureate Milton Friedman famously said, “Nothing is so permanent as a temporary government programme.” This scenario is playing out in India: smartphone manufacturers that once welcomed PLI to catalyse their assembly lines are now pushing for further concessions and extensions to remain profitable or expand production.

There is no clearer example of the stickiness of government interventions that try to protect favoured industries than India’s automobile sector. High tariffs, introduced in the 1950s to protect domestic manufacturers, were never rolled back. Today, the Indian auto industry remains largely insulated and uncompetitive globally, coming in 23rd on the list of exporters. It continues to resist not just liberalisation, but also free trade agreements with the developed world, which could result in far more growth and jobs in more competitive sectors like garments. This is the unseen cost of propping up uncompetitive industries.

Such lobbying also distorts business decisions. Instead of competing on efficiency and innovation, firms end up diverting resources towards securing favourable government concessions. The result is a self-reinforcing cycle: policymakers keep renewing or enlarging schemes like PLI, fearing job losses or capital flight if they withdraw support. Over time, this erodes the very competitiveness that incentives were meant to build. This is a major reason why Indian firms are among the lowest investors in R&D across the world, once competitiveness depends not on innovation, but on navigating the regulatory minefields.

Another way schemes such as PLI distort incentives is by imposing onerous compliance demands. To qualify, companies must satisfy a long list of conditions: investment thresholds, local sourcing requirements, production targets and detailed documentation of every step in the manufacturing process. Such stringent requirements are standard practice because, for the government, appearing vigilant against fraud is more important than providing straightforward access to funds. This is also why proposed redesigns of the scheme that attempt to make it easy to disburse funds are non-starters.

The labyrinth of forms, inspections and audits means companies have to devote significant administrative resources just to navigate the compliance landscape. This is time and money that could otherwise be invested in productivity enhancements or market expansion. In practice, the companies best at handling red tape—not necessarily the most competitive—end up capturing the bulk of the incentives.

So what is the alternative? Even proponents of industrial policy tools such as PLI accept that for a true acceleration in economic growth, as experienced by East Asian economies, structural reforms are needed. These reforms give people greater freedom to engage in productive activities without excessive government interference. Complex land-acquisition rules, inflexible labour laws and cumbersome approval processes are just some examples of barriers that drive up the cost of doing business in India. Tackling these issues will not only allow local entrepreneurs to grow and create jobs but also signal to foreign investors that India is committed to improving its business environment. As a bonus, such reforms will not cost the exchequer a single rupee. Without these reforms, no incentive programme can drive manufacturing at scale.

Production-Linked Incentives may promise a quick shot in the arm for India’s manufacturing sector, but they come at a significant price. By perpetuating the costs of government-directed production and distorting the incentives of industry, PLI could do more harm than good over the long term. The government would be better served by doubling down on its efforts to tackle root causes of low competitiveness through reforms. It’s time to pull the plug on PLI and put in its place a credible programme for reform.

The writer is programme manager at the Foundation for Economic Development, a Delhi-based public policy non-profit organisation

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