India’s production linked incentives: How Nepal can benefit from the scheme

The PLI can be a source of employment opportunities for a lot of Nepali individuals in the coming years.

Prajjwal Dhungana

  • Read Time 3 min.

The government of India launched the Production Linked Incentive Scheme (PLI) in March 2020 targeting three sectors–mobile and electrical components manufacturing, pharmaceutical, and medical device manufacturing. Under the saga of Atmanirbhar Bharat, the PLI was initiated with the objectives of developing large-scale manufacturing capacity, import substitution, export promotion, and employment generation.

As of now, it has been extended to 15 different sectors including food processing, textile, steel, clean energy, etc with a total budget allocation of INR 1.93 lakh crore in 5-6 years. The debate on the merits and ramifications of the scheme for India is ever-burgeoning. But there is no inquiry on its impact on Nepali economy–the subject of this article. 

The PLI is essentially an export-led growth strategy for India with nine of the fifteen sectors possessing an export potential of INR 2 lakh crore per year. Export-led growth, with a combination of incentives in the PLI, subsidizes goods and services enabling the rest of the world including Nepali consumers to enjoy them at a reduced price. Moreover, this also increases the variety of commodities and services a consumer can choose from. Reduced prices and expanded consumption choices together can have unprecedented welfare implications for a least-developed country like ours. 

Sectors included in the PLI such as steel, food processing, automobiles, electronics/technology, and pharmaceutical among others are crucial to Nepal since they include one of the top ten products Nepal imported from India in 2021. Besides increased welfare, export-oriented growth due to the PLI in India appears to subdue the exploding trade deficit of Nepal. 

Similarly, many sunrise sectors included in the PLI hold tremendous potential for the future of Nepal. Manufacturing medical devices–a sector in the PLI–can help decrease ever-rising health costs borne by Nepali consumers. Nepal can also cash on the growth of sectors such as Manufacturing Advanced Chemistry Cell (ACC), Solar PV modules, and White Goods (ACs and LEDs) thereby strengthening its role and commitment toward a clean and green future.

Furthermore, growth in various sectors including intermediate goods in India can help Nepali enterprises to obtain raw materials at a cheaper price. This ultimately helps in the establishment of various manufacturing businesses in Nepal on the one hand and promoting existing ventures to become competitive and survive in the global market on the other.

The PLI scheme also aspires to generate over 6 million jobs in the next five years. Although there has been no formal study of the total number of labor migrants in India from Nepal, it has been estimated that nearly three to four million Nepalis work in various parts of India mostly as a low-skilled labor force, according to a report by International Organization for Migration (IOM).

Thus, the PLI can be a source of employment opportunities for a lot of Nepali individuals in the coming years. This will also incentivize other Nepalis opting for or already working abroad in other countries to work in India due to other benefits such as an open-border between Nepal and India and socio-cultural commonality.

Finally, the PLI in India comes with a multitude of externalities for Nepal including technology and knowledge spillover and transfer. When a labor migrant from the Indian pharmaceutical sector returns to the country, he brings not only his earnings but also knowledge and experience enough to start the medicine industry. In the same way, the invention of a new pharmaceutical product, efficient batteries, or even new production processes can be easily transferred to our country without the cost of going through the arduous task of devising them.

However, for the aforementioned benefits–increased consumer welfare, wide employment opportunities, and positive externalities–to materialize, the government should adopt facilitative policies. If the government intervenes and enacts protectionist tariff or non-tariff measures guided by the petty self-interest of organized stakeholders on the products of the PLI sectors or discourages foreign employment in India, Nepal will lose once in a lifetime opportunity that comes from being a neighbor of an economically vibrant nation. 

There is no doubt that some industries in Nepal will be out of business due to their inability to compete with the PLI-subsidized firms in the world market. People associated with these industries will get unemployed or may even fall into the perils of poverty. Yet, it is on us as a nation to decide if we want to sacrifice the good of many for the stewardship of a few inefficient firms and the resulting consequences. Pursuing conducive policies does not mean leaving bankrupt firms and unemployed individuals on the road. The government can institute various social security programs for them until they are rehabilitated for other industries.

Thus, it is the need of the hour to collaborate with the PLI scheme of India as well as the Indian government to reap maximum benefits in its venture to bring global power to the East.

Prajjwal Dhungana is an undergraduate student of Economics at Kathmandu University School of Arts. He is currently exploring different fields of economics with policy implications.