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PLI Scheme: Perfect recipe to boost economic growth of Indian food processing industry


Government of India passed the Approval Order for the much-awaited PLI Scheme for Food Processing sector, on 9th April 2021, with budgeted incentive outlay of Rs 10,900 crore over a period of six years starting from FY 2021-22.

The order lays down the scheme’s objectives of boosting local production and sales, creating global Indian food manufacturing brands, increasing employment opportunities for off-farm jobs and, increasing the income of Indian farmers.

Broadly, the Scheme has following components:

  • Incentivising large Indian manufacturers (in prescribed food segments only), who achieve threshold investment and sales (given in table below)
  • Supporting small and medium manufacturers of innovative/ organic products
  • Creating global Indian Food brands, by supporting branding and marketing activities outside India

Incentive will be given to eligible players in segments – Ready to Eat (RTE)/ Ready to Cook (RTC) including Millet based foods, Marine products, Processed Fruits & Vegetables and Mozzarella Cheese.

Minimum threshold investment to qualify for the scheme ranges from Rs 23 crore to Rs100 crore, with threshold sales ranging from Rs 150 crore to Rs 500 crore. Once eligible, incentive will be granted in the range of 4% to 10%, depending upon the approved sub sectors.

Let us now compute the incentive for a manufacturer of RTE products, basis parameters above.

Say, a Company invests Rs 100 crore in additional machinery to expand its operations. Incremental sales will be delta between eligible sales for the year of incentive claim with base year (FY 2019-20 and say sales was Rs 500 crore).

Incentive will be computed in below manner:

chart


*Base year will be FY 19-20 for first four years. For 5th and 6th year, base year would be FY 2021-22 and 2022-23 respectively

In the above example, with an investment of Rs 100 crore, the Company will be eligible for total incentive of Rs 100.68 crore in six years.

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In addition to criteria of minimum sales, and minimum investment, the applicants would also need to meet a minimum Cumulative Aggregate Growth Rate (CAGR). Details of the CAGR would, however, be specified in detailed guidelines.

Government has also taken another step in its endeavour to promote ‘Make in India’, by covering only those products, for incentivisation, whose end to end manufacturing takes place in India.

Moving on to the second component of the scheme, in order to encourage small and medium enterprises manufacturing innovative and organic food products, in abovementioned food segments, pre-requirement to invest in additional plant and machinery has been dispensed off.

Selection of applicants in this category will instead be based on nature and stage of their product and marketing development, business plan.

This is indeed a reflective of Government’s intention to promote innovation in the MSME segment. To further boost morale of this segment, innovative and organic products in all product segments may be made eligible for the incentive.

In addition, to boost local production and sales, the Government also wants to encourage Indian food brands to compete in international markets and will support their branding (In-store branding, shelf space renting in large stores and marketing). Additional grants, to the maximum extent of Rs 50 crore, will be given for branding and marketing activities, basis 5-year programme to be submitted by applicant.

While detailed guidelines are yet to be released, broad framework as announced in the Approval Order, promises a brighter future for this sector.

For instance, criteria for incremental investment in machinery, as mentioned in approved scheme, is reasonable and encouraging as it reflective of current market trends.

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It would boost optimism further, if CAGR is also aligned with trends in recent years. Since, Food processing sector has witnessed average growth rate of around 10% in recent years, expectation of CAGR should ideally be correlated with the growth trends of this sector, in order to make its outreach more effective. Relaxation of higher threshold sales limit of Rs500 crore will also contribute to overall success of the scheme, as it will enable more food players to apply for incentives.

Another key input on which clarity is expected in the detailed guidelines are the list of eligible products within specified segments, more specifically whether biscuits and confectionery products will be covered in the product segment of RTE/ RTC.

(Achal Chawla is Tax Partner, EY India and Divya Bhushan, Director, Tax, EY India)



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