To
Shri G C Murmu
Comptroller & Auditor General of India (CAG)
Dear Shri Murmu,
I had earlier written to you on the pros and cons of the Production Linked Incentive Scheme (PLI) under which the Central Ministries extend subsidies to private companies to incentivise them to boost indigenous production of different items critically needed in the economy. My last letter dated 4-12-2022 can be readily accessed at https://countercurrents.org/2022/12/production-linked-incentive-pli-scheme-is-it-prudent-to-subsidise-industry/
Subsidising private industry at the cost of the public exchequer:
As per indications available in the public domain as of now, the government proposes to allocate around Rs 2,00,000 crores under PLI towards subsidy to private industry over the next five years, implying an average allocation of Rs 40,000 Crores per year. It is 2/3rd of the 2023-24 budget allocation for MGNREGA, which provides employment for more than 5.54 crores of households in rural areas. This is not a small sum, considering that the 2023-24 budget projects a fiscal deficit of 5.9%, that the government has put its highly valuable CPSEs to a distress sale to raise resources, that it is curtailing allocations for obligatory commitments such as MNREGA and food security and that the government is unable to provide fully for such critical sectors as health and education. It is all the more ironic that the government should sell away its own CPSEs for a song and instead choose to subsidise profit-earning private companies, in return for societal benefits which may not be significant.
Incidentally, the Centre’s subsidies to private companies are in addition to comparable subsidies given by States to them, in the name of investment promotion, by way of concessions on land, water, electricity, taxes etc.
PLI subsidies to private companies are at the cost of the public exchequer and therefore the CAG will have to subject the same to an audit, to ascertain what kind of societal benefits the government will generate.
Non-transparency & legal implications:
Under the PLI scheme, subsidies are given on a first-come-first-served basis, which lacks adequate transparency, an approach that the apex court questioned in both the 2G Spectrum case and the case of pre-2014 coal auctions. The C&AG cannot ignore the legal implications in the case of the PLI.
What does the PLI scheme expect to achieve?
In the ten sectors chosen for PLI benefits, (Advance Chemistry Cell (ACC) Batteries, Electronic/Technology Products, Automobiles & Auto Components, Pharmaceuticals drugs, Telecom & Networking Products, Textile Products: MMF segment and technical textiles, Food Products, High-Efficiency Solar PV Modules, White Goods (Air Conditioners and LED Lights), Specialty Steel), one common objective expected to be realised is that the beneficiary units should attain certain predetermined levels of production, subject to realisation of which subsidies are to be released.
Since the overarching purpose of the PLI is to promote self-reliance in each of these areas of manufacture, merely linking subsidies to the production of a finished product may not suffice. For example, the beneficiary industry could import the components, assemble them into the finished product and export it or sell it in the domestic market, in which case the domestic value addition could be negligible. Would such a situation justify the government subsidising the private industry?
In the normal course, assuming for a moment that subsidies are the best way to boost production, one would expect such subsidies to result in making available finished products at globally competitive prices, with decreasing import content, enhancing domestic value addition, generating employment, triggering indigenous technology development that is readily accessible to others within the country and so on. Unless in each case of a beneficiary industry, each of these objectives is well-defined and quantified over a given timeframe and the subsidy payments linked to the same, the subsidies paid will result in realising such expected benefits. Subsidising profit-earning private manufacturing units without achieving commensurate benefits for society would amount to wasteful public expenditure and promote crony capitalism.
Ground realities:
Across the ten sectors to which PLI is applicable, the subsidy is linked to a certain percentage of the sales revenue. In the case of almost all the sectors, there is no stipulation about minimum value addition, minimum numbers of persons to be employed, a minimum percentage of exports and foreign exchange earnings and a minimum effort towards technology development, except in the case of advanced cell manufacture for which the minimum value addition is 25-50% over a 5-year timeframe and in the case of automobile items for which the minimum value addition of 50%.
In the specific case of large semiconductor fabrication units like the Vedanta-Foxconn unit proposed to be set up in Gujarat, the quantum of subsidy offered under a PLI-like scheme is mind-boggling, to the extent of 50% of the project cost, the project cost itself being as high as Rs 1.5 lakh Crores, without any tangible commitment on employment, value addition, competitive pricing etc.
In other words, in the case of most of these sectors, the Ministries are giving away subsidies linked to sales turnover, without knowing whether those subsidies are going to yield tangible societal benefits or not, such as specific levels of employment, finished products supplied at globally competitive prices, whether the units are going to generate foreign exchange earnings and whether they will contribute to the indigenisation of technology and self-reliance.
How to evaluate PLI subsidies?
In economic terms, one rupee of subsidy given to a unit can be justified only if it yields a reasonable return on it in terms of the discounted value of the future societal benefits such as employment, value addition, price advantage and indigenous technology development. In the case of the PLI schemes for most sectors, on the face of it, the subsidies will not yield such reasonable returns.
Do PLI subsidies lead to technology indigenisation?
None of the sectoral PLI schemes has any stipulation on R&D investment and consequent technology development. Even if a unit invests in R&D, it will have intellectual property rights over it, not accessible to others for wider indigenisation. The only way to ensure the promotion of self-reliance through these PLI schemes would be to insist on the beneficiary units contributing a certain proportion of their profits to a common R&D fund to be administered by the Science & Technology Department to channel the same into research institutions for technology development that will be readily accessible to all those involved in manufacturing activity aimed at promoting self-reliance. Unfortunately, the way the sectoral PLI schemes have been hurriedly formulated, there is no such stipulation.
Need for special scrutiny by the C&AG:
While the allocation for the PLI schemes for the ten sectors over a 5-year timeframe stands today at Rs 2 lakh crores, the entire amount going to private industry as subsidies without tangible benefits to the economy, in the coming days, it is possible that the government will enlarge scheme to other sectors and also enhance the allocations, all at the cost of the public exchequer. There should be a valid justification for giving such huge subsidies to profit-earning private companies, and the government should be held accountable to the Parliament and the public at large. From this point of view, I feel that the C&AG is obligated to subject these sectoral PLI schemes to the strictest scrutiny and place its findings before the Parliament.
Regards,
Yours sincerely,
E A S Sarma
Former Secretary to the Government of India
Visakhapatnam
