Production Linked Incentives: Green shoots in Indian Manufacturing

Mutual Fund
Aug 2, 2022 by Axis Mutual Fund | Mutual Fund | 0 Downloaded

Background to the PLI scheme

As a measure to bring about structural reforms in the manufacturing sector and promote domestic manufacturing, the government announced an outlay of Rs. 1.97 Lakh Cr. for the Production Linked Incentive (PLI) Schemes across 14 key sectors, to create national manufacturing champions and to create 60 lakh new jobs. The scheme targeted an increase in manufacturing output by Rs. 30 lakh Cr. over the next 5 years.

Key Objectives of the PLI scheme

Key Objectives of the PLI scheme

Source: National investment promotion & facilitation agency

The basic premise on which the PLI schemes stands are as follows:

  • Outcome-based and result-oriented: This means that incentives will be disbursed only after production has taken place in the country.

  • Linking incentives to output: The calculation of incentives will be based on incremental production to be achieved at a high rate of growth. To achieve this incremental production, beneficiaries will be required to make additional investments in establishing green-field facilities or carrying out expansion of existing facilities.

  • Creating ‘champions’ to maximize impact: The scheme focuses on size and scale by selecting those players who can deliver on volumes. The targeted nature of the scheme will make it highly effective and the beneficiaries are likely to become globally competitive.

  • Selection of sectors: Scope tailored to cover cutting-edge technology, integrate with global value chains and create large-scale employment.

The strategy behind the scheme is to offer companies incentives on incremental sales from products manufactured in India, over the base year. The scheme also invites foreign companies to set up units in India alongside encouraging local companies to set up or expand existing manufacturing units, generate more employment, and cut down the country's reliance on imports.

PLI – Dovetails other manufacturing incentives

In addition, to the PLI scheme which is the government’s flagship program on domestic manufacturing, the government currently offers several other incentives to manufacturers in select sectors. Notable amongst them are in key sunrise sectors as below

Dovetails other manufacturing incentives

Source: Government of India, News articles, MeitY, Investec Securities Research

Visible Impact

Incoming data for overall projects under implementation (as compiled by CMIE) for QE Jun-22 illustrated a broad based pickup in both private and public investment projects. While growth in public projects under implementation grew to a four-quarter high, private projects rose above previous quarter levels, albeit at a slower pace. Within new investments, whilst private investments accelerated on a four-quarter trailing basis, public investments decelerated.

Visible Impact

Source: CEIC, Morgan Stanley, Haver Analytics

Sector data within new investments shows that growth moderated for all sectors barring electricity, which jumped up driven by base effect. Implementation of Production Linked Incentive (PLI) schemes for 14 sectors (including semiconductors) augurs well, in our view, for indigenous manufacturing capabilities to gather pace in the coming months. In terms of foreign investments, FDI flows remain robust, tracking at 2.7% of GDP on a 12-month trailing basis as of Apr-22.

Furthermore, while growth in center’s capex in FYTD23 is hovering at 70.1% YoY, it is expected to average at 24.5% YoY in F2023 as per budgeted estimates, as capex touches an 18-year high of 2.9% of GDP. In addition, the trend in state capex shows a slight moderation, albeit robust investment activity by states recording double-digit growth.

Another visible change is the change in sourcing strategies by large international manufacturers. With surging demand for products, the PLI scheme has become a trigger for global manufacturers to build/assemble products in India to meet domestic demand. Further, to optimize scale of operations a small proportion of external demand is also being catered to from Indian shores.

The situation in China and the need to adopt a China+1 manufacturing base has accelerated the pace of domestic capex by foreign multinationals. Examples as below

Company wise Sourcing Strategy

Source: Investec, Company reports. Data as on 28th July 2022. Stocks sectors mentioned are meant for illustrative purposes and should not be treated as recommendations or investment advice.

Below examples provides a breakdown by sector of the capex projects indicating that investment activity is gradually gaining strength and breadth.

Breakdown by sector of the capex projects indicating that investment activity is gradually gaining strength and breadth

Source: Ministry of Commerce, Investec Securities Research. Data as of 28th July 2022

Annexure - Industry Wise Update

Industry Wise Update

* The total projected investment value excludes the estimated investments for semiconductors. US$20.5bn is announced for phase 1 of the scheme. Final details are awaited.

Source: Morgan Stanley, Ministry of Commerce, MEITY. Data as of 28th July 2022. Stocks/sectors mentioned are not to be treated as investment recommendations or investment advice.


Source of Data: Axis MF Research, Investec Securities Research, Morgan Stanley, Ministry of Commerce, MeiTY.

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable.

While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

(Mutual Fund investments are subject to market risks, read all scheme related documents carefully.)