To
Shri G C Murmu
Comptroller & Auditor General of India (CAG)
Dear Shri Murmu,
Please refer to my letter dated 2-6-2023 addressed to you on the above subject (https://countercurrents.org/2023/06/pli-scheme-do-subsidies-to-profit-earning-private-manufacturers-yield-commensurate-societal-benefits/).
In that letter, I pointed out that subsidising profit-earning private manufacturing companies, as envisaged in Production-Linked Incentive (PLI) and other PLI-like schemes, would not necessarily be the most prudent way to promote technological self-reliance. The fact that subsidies are provided to private companies under those schemes on a first-come-first-served basis without linking subsidy payments to the beneficiary companies delivering well-defined outcomes, raise serious concerns about the transparency and the legality of the approach and its propriety.
Where subsidy payments are linked to specific outcomes to be delivered, an independent evaluation of the outcomes would be necessary. In the case of some sectors, subsidy payments are simplistically linked only to sales/ production levels, without stipulating other more important requirements such as upgradation of technology, minimisation of import content, employment generation, foreign exchange earnings etc. In such cases, there is a likelihood of the subsidies being misused. Given such concerns, I requested your office to conduct a special audit of all such schemes so as to be able to inform the Parliament of the extent to which such subsidy payments are justified/ misused. This is important as subsidies paid out of the budget for these schemes involve an annual outgo of more than Rs 40,000 crores.
In this connection, I invite your attention in particular to the following paragraph of my letter cited above:
“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 private industry?“
These concerns of mine stand fully corroborated by the way subsidy amounts were found to have been misappropriated by beneficiary companies in a PLI-like scheme, namely, the Faster Adoption and Manufacturing of Electric Vehicles in India Phase II (FAME India Phase II), as admitted by the Ministry of Heavy Industries vide their statement dated 25-7-2023
“The Ministry of Heavy Industries has received seventeen (17 nos) complaints regarding misappropriation of subsidies under the Government’s FAME India Phase II scheme by some electric vehicles manufacturers. The complaints are mainly related to the violation of Phased Manufacturing Programme (PMP) guidelines under FAME India Scheme Phase-II. All the complaint cases have been referred to the testing agencies for re-verification. After examination of reports in respect of two OEMs, the models of these two OEMs have been suspended from the FAME scheme. Further, the processing of their pending claims has been stopped till they submit sufficient evidence to show their compliance to PMP timelines” (https://pib.gov.in/PressReleseDetail.aspx?PRID=1942508)
According to news reports (https://www.livemint.com/news/india/twowheeler-electric-makers-seek-waiver-of-penalty-as-indian-government-threatens-legal-action-11690477490999.html), the Ministry had initiated a probe regarding alleged misappropriation of subsidies under the FAME scheme. Automakers covered under the scheme are eligible for subsidies on the condition that vehicles and their components are completely manufactured in India under the Phased Manufacturing Programme (PMP). PMP is aimed at promoting indigenous manufacturing of electric vehicles, and inputs of subassemblies, whereas companies have been found importing products and assembling the same in the country, thereby flouting the indigenization norm.
There are important concerns that arise from the above-cited case of misuse of subsidy under the FAME scheme.
- In principle, subsidising profit-earning private companies is highly imprudent, as such subsidies constitute a diversion of scarce fiscal resources from socially more important items of public expenditure such as food security, employment guarantee, subsidies for providing social security cover for disadvantaged groups etc.
- There are other more efficacious instruments of policy, such as ensuring transparency and fairness in governance, targeted tax incentives etc. compared to subsidies, for promoting investments for technological upgradation aimed at self-reliance
- Even if limited subsidies are to be given, subsidy payments should be linked to measurable outcomes in terms of societal benefits such as employment generation, net domestic value addition etc. Such outcomes should be subject to independent evaluation.
- There are several sectors in the case of which no measurable outcomes have been prescribed as a precondition to payment of subsidies. In such cases, there is a clear possibility of subsidies being misused on a large scale. The extent of such misuse of scarce fiscal resources needs to be assessed and the schemes reviewed.
May I, therefore, request your office to undertake a special audit of the implementation of all PLI and PLI-like schemes so far, the inherent loopholes in those schemes as they stand designed today and the need for alternate, more prudent policy approaches that need to replace the subsidy idea for achieving outcomes more beneficial for the economy?
Considering the magnitude of the subsidy payments envisaged under these schemes, exceeding Rs 2 lakh crores over a 5-year timeframe, it is desirable that your office conducts a comprehensive audit at the earliest to ensure that mid-course corrections can be made before scarce fiscal resources are frittered away.
Regards,
Yours sincerely,
E A S Sarma
Former Secretary to the Government of India
Visakhapatnam
