IMA Analysis
Friday November 15, 2024
The Food-Processing PLI Scheme: Progress and Challenges
Executive Summary
- India’s Food-Processing PLI scheme is supporting domestic production and improving the sector’s global competitiveness, especially against low-cost competitors like China.
- The incentives on offer encourage innovation in processing, packaging and product development, improving quality and shelf life.
- However, challenges remain, including strict local sourcing rules that impact import-dependent companies.
- High growth targets (10-12% annually) create barriers, as do penalties for missing CapEx deadlines. Both of these requirements can potentially limit incentive pay-outs.
- The scheme’s strict compliance requirements create added costs, especially for smaller companies. Streamlining certain requirements could ease this burden.
- To maximise the scheme’s long-term impact, industry stakeholders suggest granting flexibility to align with real-world conditions.
| The Production-Linked Incentive (PLI) Scheme, introduced in 2021-22 as part of the government’s Make in India initiative, is a bold move to strengthen India’s manufacturing capabilities across key sectors. Initially focused on industries like electronics, automobiles and pharmaceuticals, the scheme has been extended to a range of high-potential sectors, including the food processing industry. With an outlay of Rs 109 billion, the food processing PLI scheme is designed to help India capitalise on its vast agricultural resources and strengthen Indian brands in global markets. |
| The scheme incentivises production, encourages exports and aims to reduce import dependency by rewarding incremental revenue and capital expenditure. It consists of three main components: the first focuses on supporting manufacturing in major food categories such as ready-to-cook/ready-to-eat foods, processed fruits and vegetables, marine products and mozzarella cheese. The second promotes innovative and organic products from small and medium enterprises (SMEs), while the third supports the branding and marketing of Indian food products internationally. |
| Since its inception the scheme has spurred investments and capacity creation among eligible companies. However, a range of regulatory and operational challenges remain. To better understand the on-ground situation, we conducted in-depth interviews with several food processing companies approved under the PLI scheme. This paper builds on a June 2023 IMA report on the PLI scheme[1], highlighting the food-processing PLI’s benefits as well as some of the operational hurdles it faces. It also provides recommendations for optimising the scheme – the learnings from which, we believe, are relevant across sectors. |
| The impact: Many positives |
| · Strengthening domestic manufacturing and global competitiveness: The companies we spoke with agreed that the PLI scheme’s financial support enables them to better compete with low-cost global players, particularly from China. On the whole, it is also bolstering India’s domestic manufacturing ecosystem. |
| · Strong project management support: Companies report benefiting from the strong project management support they are receiving from IFCI, a government-backed NBFC, which has streamlined processes via a standardised online platform. IFCI’s professionalism and the Ministry of Food Processing Industries' (MOFPI) accessibility in handling escalations ensure strong support. |
| · Enhanced global market reach: A major FMCG player reports that its export-oriented segments are growing strongly, aligning with the scheme's goal of positioning India as a global food supplier. The PLI incentives have driven innovations in processing and packaging, enhancing product quality and shelf life, both of which are critical for export success. |
| · High levels of transparency and cooperation: Industry leaders also appreciate the government’s transparent and structured approach towards the PLI scheme. The Ministry's proactive communication, efficient query resolution and accessible feedback channels have been instrumental in fostering industry confidence and keeping the scheme relevant. |
| Challenges and recommendations |
| Limited Flexibility in Ingredient Sourcing: The PLI scheme’s strict guidelines mandate that nearly all manufacturing, including ingredient sourcing, take place within India, with only limited exceptions for certain items like edible oils and additives. These rules create significant hurdles for companies that have grown up with import dependency in terms of raw materials. Even minor deviations – such as washing ingredients in another country – can be grounds for disqualification from receiving payouts. For instance, one organisation, after having made substantial capital investments as part of its PLI commitment, received just ~20% of the expected incentives for using a minimal amount of imported content. Additionally, companies with preexisting imported stock, face inventory waste and added costs. Furthermore, Indian-sourced ingredients often struggle to meet export standards, particularly around pesticide levels, making exclusive domestic sourcing a complex and costly requirement. |
| Recommendation: Introducing a grace period or allowing a small permissible percentage (e.g., 3%) of imported essential ingredients could prevent inventory waste, ease compliance and facilitate a smoother transition to full localisation, while preserving the scheme’s objectives. |
| Stiff Growth Targets: A key challenge for companies is achieving the required 10-12% year-on-year growth in designated product segments to qualify for incentives. For example, spice-industry giant missed out on incentives last year due to underperformance in specific HSN codes, falling short of the 10% growth requirement. |
| Recommendation: Growth targets based on sector-specific dynamics could allow companies to qualify for incentives even if they do not meet the exact requirement across all segments. For instance, businesses could be permitted to make up shortfalls in specific segments with higher growth in others, or allowed a buffer period of 1-2 years for consistent performance before the stricter targets are enforced. This would account for market fluctuations and help ensure that companies can still benefit from the scheme while driving overall growth in the sector. |
| Strict CapEx Guidelines: The PLI scheme requires companies to meet specific CapEx spending targets within set timeframes, with penalties for non-compliance that can lead to a complete loss of incentives. Several companies have faced difficulties meeting these deadlines due to global supply chain disruptions and delays in equipment delivery, especially in the wake of Covid-19 and subsequent geopolitical events. Furthermore, only capitalised investments that are fully installed, operational and invoiced qualify, creating a narrow window for compliance and added pressure to manage each project detail meticulously. Delays in project completion, inspections, or interpretation by authorities can lead to significant financial losses. |
| Recommendation: The government should consider granting flexibility on capital expenditure deadlines, accommodating delays due to external factors, or allowing partial credit for in-progress investments. Alternatively, providing a grace period or a phased compliance approach would help companies fulfil their capital commitments effectively without risking the entire incentive. |
| High Operational Costs and Stringent Compliance Requirements: The PLI scheme requires rigorous periodic audits and detailed documentation, significantly adding to operational costs. Meeting these compliance standards demands dedicated resources, with some companies allocating 3-4 staff members solely for quarterly reporting. For smaller teams, such a heavy resource allocation can be especially challenging, diverting attention from core operations. |
| Recommendation: Streamlining compliance guidelines, along with offering government reimbursement for audit-related costs, would ease this burden and enhance the scheme's appeal, particularly for smaller firms with limited resources. Well begun, but only half done… From all accounts, the food-processing PLI scheme has spurred fresh investments in the sector, including ones that, at the margin, may not have happened but for the incentives being offered. Like in other sectors, it is contributing meaningfully to export growth and helping reduce India’s import dependency. However, the scheme’s overly strict rules, which offer minimal operational flexibility in certain respects, places a heavy emphasis on formal compliance over practical outcomes. This ‘form-over-substance’ approach has created several ongoing challenges. While the government has demonstrated welcome openness to feedback, the point-by-point compliance requirements remain in place. In order to build upon the PLI’s early successes, the Centre may wish to consider making the scheme more flexible and better aligned with the on-grounds needs of industry. This would help maximise the scheme’s long-term impact and serve as a model for incentive-based programmes in other sectors. |
| The contents of this paper are based on IMA India’s in-house research. The paper is meant for the exclusive consumption of IMA’s Peer Group Forum members and may not be copied, shared or distributed without explicit permission. This paper is available on the Knowledge Centre of the IMA website. Additionally, a podcast version is available here and can be heard on the podcast platform of your choice. |
[1] Assessing the PLI Scheme: The Industry Experience Thus Far, and the Way Forward
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