India has seen some benefit in chemicals, where it already had an ecosystem that no other country could boast of. In the period of globalisation, industries get entrenched in a particular location. The benefits derived from a cluster-based approach are difficult to replicate in a new location, and this leads to dominance of a few countries and few locations in a particular manufacturing activity. Even if another location elsewhere in the globe has an advantage in terms of labour, nearness to market, raw material etc, yet this proves to be inadequate to pull industries to that location, especially with declining duty protection rates under WTO and the gradual opening up of the economy and markets that globalisation demands.
Manufacturers have not been able to enjoy full access to home markets. It has become feasible to access a giant market like India though some other country with whom we may have a trade treaty.
In this situation, it becomes imperative that the government lends a helping hand to industry to take root in a new location.
Luckily in many industries, the market already exists in the country. For example, cell phones, air-conditioning, electronics, etc all have ready markets in the country and are large import categories. For some of these categories, we may already be the largest market in the world.
Also, many of these categories are employment-intensive and manufacturing margins are thin. Production-linked incentive plans seek to achieve the same and can prove to be a game changer with very little fiscal cost, at least over a period of time. In the production-linked incentive scheme for electronics for example, Rs. 40,951 crore is earmarked over the next five years. For mobile phone assembly, for example, it will provide 6% of incremental sales in the first 2 years, 5% in the next 2 and 4% in the last year.
Similar schemes are being extended in many other industries and have brought a level of energy into entrepreneurs. The wages earned by the staff would be taxable and would provide incremental revenues. Assuming a breakeven level of manufacturing in these assembly lines before incentives, the incentive themselves would provide profits and would be taxed.
For example, a 5 per cent PBT margin would imply a 1.25 per cent tax. Similarly, a 15 per cent wage cost, even if taxed at lowest 6 per cent would mean another 0.75 per cent in taxes. The net impact to the government would be hence 3 per cent, and in effect, the fiscal impact would be substantially lower than the budgeted amount. Once the scheme runs its course, there would be a more durable increase in economic activity and, hence, government revenues.
While this move would require the government to provide support in the initial years, the benefit would be derived for a long time.
The scheme itself is being complemented with a fair amount of duty protection and encouragement for component manufacture also. It is also being implemented when similar sentiment of doing more at home pervades around the world as a consequence of Covid-19 and doing more indigenously. China+1 strategy being adopted by several governments and companies to develop a second sourcing base does provide tailwinds to the move of the government.
Policymakers are looking at the benefits India has derived by being part of trade blocks and allowing duty free imports into the country from such nations and if such a strategy is sustainable. This would also encourage global manufacturing targeting Indian markets to look at India as a manufacturing base. With some luck, India could see manufacturing gain better prominence in the overall economy.