For the government, giving conditional incentives seems clearly the way to make money work. A performance criterion helps select players. The first sense of this approach was when conditional cash transfers were made to households in Latin American countries; They ensured that the children went to school or underwent regular medical check-ups. In India, the noon meal plan is one example, as the free meal ensures that parents send their children to school. This worked well for girls, especially from the lower income groups, who would not otherwise be allowed to go to school.
The PLI is therefore a very progressive approach to offering incentives to the industry. It remains to be seen how the global community interprets it as it provides cash directly to companies that meet certain performance benchmarks. It can be argued that it is not a subsidy, such as those applied to agriculture, where inputs are delivered practically free of charge to farmers. The PLI has been prepared to promote national production, against the importation of the product from other countries. It does not distort prices, but makes the industry more competitive.
This should help get past the barrier. This can also be applied in other areas to make public spending more efficient. The government had offered alternative corporate tax rate schemes to companies (22% versus 30%), and the observation was that, while they made use of the benefit, there was little evidence that it improved efficiency or led to increased investment. In this context, the government can condition tax benefits where companies that are capable of generating an investment of a certain minimum amount along with productive and labor performance (PLI speaks of the first two components) can obtain a tax refund.
This will ensure that companies invest more rather than using the lower tax benefit to pay higher dividends or build reserves. Indeed, there was a time when tax laws had the concept of an investment reserve that could be deducted from earnings before taxes, compensation through a refund will ensure that companies contribute to capital formation, which today it is a challenge.
A similar idea can be pursued in job creation, where units, from SMEs to large companies, can receive an incentive based on job creation with firm targets set. Employment is the critical factor driving economies because, in the absence of new job creation, demand cannot be sustained. Employment has been a problem even before the pandemic, where GDP growth did not translate into commensurate job creation. With the increased reliance on technology after the pandemic, job creation is rarely on the radar of large companies. Offering incentives will work well and ensure that the focus is on being fair to work.
The important part of this story will be how well the PLI works in the next 4-5 years, the average time frame that has been established for the 13 industries identified in November 2020. Overall, the government has targeted around ` 2 lakh crore incentive spread over approximately five years. There will be indirect effects in the export sector, especially in the pharmaceutical, textile sector, etc., although the initial focus was more on import substitution through increased domestic production.
As the idea becomes popular, the government could also use the PLI scheme to change the cropping pattern in India, which is heavily skewed towards rice and wheat as they have MSP-based acquisitions. This can help farmers migrate to crops like oilseeds and legumes where we are most vulnerable and help conserve water. If this is accepted conceptually, the details can be worked out with the panchayats for implementation.
Chief Economist, CARE Ratings
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