Production Linked Incentive (PLI) Scheme: Rationale, 14 Sectors, Design, Achievements in Mobiles and Electronics, Criticism and Reforms (UPSC Notes + PYQs)

Rationale

Manufacturing has stayed at about 15-17% of India’s GDP for decades, while East Asian economies grew rich by becoming factories for the world. Indian firms face higher costs of power, logistics, credit and compliance, and they lack scale. Past tools such as tariff protection and tax holidays did not fix this. The PLI idea is simple: reward output, not input. A firm gets cash only if it actually produces and sells more. It also draws global firms looking to diversify supply chains away from China (“China plus one”).

Design

• Incentive of roughly 4-6% (varies by sector, up to 20% in some) on incremental sales over a base year, for about five years.
• Firms must meet thresholds for investment and sales growth; selection is by application or bidding.
• Some schemes reward domestic value addition (for example, batteries and solar modules).
• Run by the line ministry for each sector, with an empowered group of secretaries overseeing.

The 14 sectors

Pharmaceuticals has two separate schemes (bulk drugs and finished drugs), which with the above makes 14.

What it has achieved

• Mobile phones: India became the world’s second-largest phone maker; smartphone exports rose from about USD 0.3 billion in 2017-18 to over USD 20 billion in 2024-25, led by Apple’s contract makers and Samsung. Phones became one of India’s top export items.
• Pharma: domestic production of bulk drugs such as penicillin-G began again after decades of dependence on China.
• The Government reported investment of over ₹1.5 lakh crore, production worth over ₹14 lakh crore and over 11 lakh jobs linked to PLI by 2024.
• Food PLI helped Indian brands of millet products and processed food enter foreign markets.

Criticism

• Low value addition: economists including Raghuram Rajan argued (2023) that phone “manufacturing” is mostly assembly of imported parts, so subsidies may exceed real value added.
• Slow disbursement: only a fraction of the outlay had been paid by 2024-25; some sectors (specialty steel, ACC batteries) lagged badly.
• Concentration: a few large firms get most of the money.
• Fiscal cost and WTO risk: export-linked subsidies can be challenged.
• Jobs: capital-intensive sectors create fewer jobs than garments or footwear, which were left out at first.

Improving outcomes

Link incentives to domestic value addition and components, not just final assembly; this is the logic of the Electronics Component Manufacturing Scheme (2025) and the semiconductor mission. Speed up payments, add labour-intensive sectors such as footwear and toys, cut tariffs on inputs to keep costs low, and invest in logistics and skills so that firms remain after subsidies end.

Semiconductors and the next wave

PLI was followed by bigger bets on industries where India had almost no base. The India Semiconductor Mission (2021), with an outlay of about ₹76,000 crore, offers up to half the project cost for chip fabs, display fabs and assembly, testing and packaging units. Micron’s assembly plant at Sanand, the Tata-PSMC fab at Dholera and several packaging units in Gujarat, Assam and Uttar Pradesh were approved in 2023-25, and the first India-made chips were shown in 2025. The Electronics Component Manufacturing Scheme (2025) targets parts such as printed circuit boards, camera modules and passive components, answering the criticism that PLI rewarded only assembly. Together these show a shift from subsidising final goods to building deeper supply chains.

What economists measure

To judge PLI fairly, analysts look at domestic value addition (the share of a product’s value created in India), the cost per job, export growth net of imported inputs, and whether firms keep producing after incentives end. In mobiles, value addition rose from very low levels to an estimated 15-20%, compared with far higher levels in China and Vietnam. The test of PLI will be whether that share keeps rising.

PLI and the WTO

Because PLI pays on sales, including domestic sales, India argues it is not an export subsidy banned under the WTO Agreement on Subsidies. Linking payouts to exports alone would invite a challenge, as India’s older export schemes did in the 2019 US dispute.

How PLI differs from earlier industrial policy

India has tried many routes to industrial growth. The licence-permit system before 1991 told firms what to make and where. Export Processing Zones (from Kandla in 1965) and later Special Economic Zones (SEZ Act, 2005) offered tax holidays and duty-free imports inside fenced areas; many SEZ plots stayed vacant, and the tax breaks were phased out from 2020. The Make in India campaign (2014) focused on ease of doing business and FDI limits. The Merchandise Exports from India Scheme (MEIS) gave export rebates until a WTO panel ruled against it in 2019; it was replaced by RoDTEP (Remission of Duties and Taxes on Export Products), which only refunds embedded taxes.

PLI differs in three ways. It is sector-specific, picking industries where India can gain scale. It is output-linked, paid after sales are verified, so idle capacity earns nothing. And it is time-bound, meant to help firms cross a cost hump, after which scale economies should keep them competitive. The risk is the classic one of industrial policy: the State may pick the wrong sectors, and firms may lobby for extensions when the subsidy ends.

Lessons from abroad

South Korea and Taiwan in the 1960s-80s tied support to export performance and withdrew it from firms that failed. China’s rise in electronics combined cheap land and power, huge industrial clusters and a deep component ecosystem. The US Inflation Reduction Act (2022) and CHIPS Act (2022) show that rich countries also use production subsidies now. The lesson for India is that subsidies work best with a discipline test (export or value-addition targets), good infrastructure, and a clear end date.

PYQ trend

Prelims 2023 linked PLI to India’s export share. Mains GS-III 2025 asked the rationale, achievements and improvements of PLI directly. Pair it with MSMEs and Make in India.

PLI Scheme: UPSC angle

PLI Scheme UPSC PYQs (Prelims)

Questions UPSC has actually asked, from the official papers. Pick an option to check yourself.

Mains PYQs on this topic

Questions from the official UPSC Mains papers (2023-2026 in the Battle IAS Mains bank), newest first. Each links to a model answer.

1. UPSC Mains 2025 · GS Paper III · Q12 · 15 marks

   Discuss the rationale of the Production Linked Incentive (PLI) scheme. What are its achievements ? In what way can the functioning and outcomes of the scheme be improved ?

   Model answer and approach

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