India needs PLI-2 for scaling the manufacturing output

The Production Linked Incentive (PLI) scheme was launched in 2020 with an incentive outlay of 1.91 lakh crore, aiming at transforming the Indian economy into a global manufacturing hub by enhancing domestic manufacturing output, employment, and exports. Economic incentives will be provided to companies based on incremental sales to strengthen the domestic manufacturing sector. Since the launch of this program, the economy has witnessed a rise in FDI and an increase in employment opportunities in certain parts of the country. States such as Tamil Nadu, Karnataka, Gujarat, Maharashtra, Uttar Pradesh, and Telangana benefited from this scheme by attracting significant investments due to their strong industrial bases. On the other hand, states like Bihar, Jharkhand, and the North-east lag in attracting investment due to a lack of infrastructure and a low-skilled labor force. States like Punjab, Rajasthan, and Haryana witnessed moderate gains under this scheme. The empirical evidence suggests that this scheme has focused only on assembly-led manufacturing and has failed to accelerate industrial development. As of Feb 2026, investments crossed 2.16 lakh crore, production and sales exceeded 20.41 lakh crore, exports generated 8.3 lakh crore, and more than 14.39 lakh employment opportunities were created, either directly or indirectly. A total of Rs. 28,748 crore incentives have been distributed among the 14 sectors covered under PLI.

The scheme covers 14 sectors, of which only two sectors, such as mobile phone manufacturing and electronic exports, yielded desired results. There has been no improvement in the manufacturing sector’s contribution to India’s GDP since the launch of the PLI scheme. The annual contribution of the manufacturing sector to GDP in India is in the range of 16-17 percent for the period 2019-20 to 2025-26. The major drawbacks of the PLI scheme are the concentration of its benefits in the states that are already industrially developed, still heavy reliance on imported components, delays in incentive disbursement, huge fiscal burden to the government, limited technology transfer, adverse impact of international market fluctuations on exports, and lack of availability of skilled workforce in those industries covered under the PLI scheme. Though there is no universal PLI-2 for all 14 sectors, it was operational for IT Hardware (PLI-2) and specialty steel(PLI 1.2). It is also expected that the government will soon finalise PLI-2 for the sectors such as mobile phones and electronics, with the intention of enhancing domestic value addition and also integrating these sectors with global supply chains.

Industrial incentive schemes in Developed Economies

The developed economies such as China, the European Union, the USA, Japan, Germany, and South Korea have implemented various industrial incentive programs to raise domestic manufacturing, strengthen supply chains, and also to attract key industries. Unlike India, these economies focus on selected crucial sectors for achieving an absolute advantage in the international market. Though India’s PLI scheme covers multiple sectors, China focuses on areas such as Robotics, EVs, AI, aerospace, and Semiconductors. In contrast, the EU focused on clean technologies, the USA focused on semiconductor manufacturing, Japan focused on pharma, electronics, and semiconductors, South Korea focused on semiconductor manufacturing, and Germany focused on advanced manufacturing and smart factories. Advanced economies have given more emphasis to Research and Development and integrated universities, Research institutions, and industry partnerships. The clear distinction of industrial incentive schemes between India and developed economies is that, unlike production-linked cash incentives in India, developed economies often combine subsidies, grants, R&D support, tax credits, and strategic industrial policies. In 2025-26, the contribution of the manufacturing sector to GDP was 24.7 Percent in China, 14-15 percent in the EU, 20-21 Percent in Japan, 10-11 Percent in the USA, and 28 Percent in South Korea.

The way forward

The objective of transforming the Indian economy into a 5 T$ economy can be realized by focusing on Micro, small, and medium enterprises in backward areas of the country, which not only have employment potential but also huge export growth potential. The next generation reforms in the sectors covered under PLI are essential for boosting the manufacturing output. If the manufacturing sector is to achieve rapid growth and also to raise its contribution to 25 Per cent of GDP, the measures such as revision of eligibility thresholds for more participation of MSMEs, adequate credit and reserve a certain portion of incentives for MSMEs, higher Research & Development expenditure and innovation – led manufacturing, provision of physical infrastructure in backward districts, faster incentive distribution, enhance technological possibilities, industry linked apprenticeship programs, ease of doing business, enhancing export competitiveness, encourage labour -intensive industries for enhancing employment opportunities and also aligning the industrial training institutes with PLI sectors are essential. The state governments need to focus on improving governance instead of competing with each other in terms of attracting investments.

[Dr Tamma Koti Reddy is the Vice Chancellor (Incharge), ICFAI Foundation for Higher Education (A Deemed to-be-University), Hyderabad