India's economic reboot: from subsidies & waivers to pli-powered growth

From Control to Catalyst: Charting India’s New Economic Trajectory

For decades, the Indian economy has been characterized by significant government intervention, a legacy of a socialist past aimed at ensuring food security and protecting vulnerable populations. Policies like the Public Distribution System (PDS), Minimum Support Price (MSP) operations, and periodic farm loan waivers were the bedrock of this approach. However, as India aims for a $5 trillion economy, a critical re-evaluation is underway, questioning whether these tools of a bygone era are still relevant or if they now act as fetters on growth.

An influential Economic Survey once diagnosed this issue, advocating for a strategic withdrawal of the state from areas where markets could function efficiently. It proposed a radical shift: from distributing food grains to providing cash transfers, ending the distortionary practice of debt waivers, and adopting a China-like, export-led growth model under the banner ‘Assemble in India for the world’.

Today, this vision is partially transforming into reality, but with significant twists. The ‘Assemble in India’ concept has found its powerful successor in the Production Linked Incentive (PLI) Schemes, while the debate on food subsidies has taken a new turn with the multi-year extension of the world’s largest free food programme.

The Subsidy Conundrum: Reforming Food Distribution & Farm Debt

The Public Distribution System (PDS): A Shift in Thinking, A Change in Action

The traditional model of procuring, storing, and distributing food grains via the Food Corporation of India (FCI) has long been criticized for its inefficiency, leakages, and enormous costs. The Shanta Kumar Committee (2014) provided a comprehensive roadmap for reform, suggesting a trimmed beneficiary list, outsourcing FCI’s stocking operations, and a greater focus on cash transfers or food coupons. The core idea was to empower beneficiaries with choice and reduce the state’s logistical burden.

Analogy: Shifting from PDS to Direct Benefit Transfer (DBT) is like giving a person cash to buy any nutritious food they need, rather than a pre-decided basket of grains. It respects individual dietary diversity and plugs logistical leaks, ensuring the full value reaches the beneficiary.

However, the recent policy landscape reveals a different priority. Instead of moving towards cash transfers, the government has doubled down on in-kind food security. The Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY), initially a pandemic relief measure, has been extended until December 2028. This scheme provides free food grains to approximately 813 million beneficiaries and will cost the exchequer an estimated ₹11.80 lakh crore over five years. While this ensures nutritional security, it postpones the structural reforms advocated by economists to enhance efficiency.

The Perennial Debate: Farm Loan Waivers

Farm loan waivers are often announced by states as a tool for agrarian distress relief. However, economic analysis consistently points to their damaging long-term effects. The Reserve Bank of India (RBI) has repeatedly cautioned that such waivers disrupt the credit culture, incentivize strategic defaults, and strain state finances, forcing cuts in essential capital expenditure. An RBI report noted that states announcing waivers often see a subsequent rise in Non-Performing Assets (NPAs) in the agricultural sector. Despite this, the practice persists due to its political appeal, creating a moral hazard that undermines the financial discipline of the entire rural credit system.

Fun Fact: The Shanta Kumar Committee report highlighted that only about 6% of farmers in India benefit from the MSP regime, as the procurement system is heavily concentrated in a few states like Punjab, Haryana, and Madhya Pradesh. This raises questions about the equity and efficiency of the entire price support and procurement mechanism.

From ‘Assemble in India’ to a PLI-Powered Manufacturing Boom

The most significant evolution of the earlier ‘Assemble in India’ proposal is the Production Linked Incentive (PLI) scheme, launched in 2020. This ambitious policy aims to transform India into a global manufacturing hub by providing financial incentives on incremental sales of domestically manufactured products. It represents a strategic shift from broad-based subsidies to targeted, performance-based support.

Initially launched for mobile manufacturing, the PLI scheme now covers 14 key sectors, including pharmaceuticals, automobiles, textiles, and solar modules. By March 2025, the scheme had attracted realized investments of ₹1.76 trillion (US$20.3 billion) and generated over 1.2 million jobs.

Captivating Stat: The PLI scheme has been a resounding success in electronics. Mobile phone production surged by approximately 146% between FY 2020-21 and FY 2024-25, transforming India from a net importer to a significant exporter of mobile phones. Exports of electronic goods surged to over US$39 billion in 2024.

The strategy mirrors the core principles suggested in the old Economic Survey: specialization in network products, achieving economies of scale, and focusing on exports.

To master this strategy, India can remember the SALT mnemonic:

• S - Specialization: Focus on specific, high-potential sectors like electronics and pharma.
• A - Assembling Focus: Enable large-scale assembly operations, integrating into global value chains.
• L - Lucrative Markets: Target exports primarily to developed countries.
• T - Trade Enabler: Ensure that trade policies are supportive and reduce friction.

Critical Policy Appraisal

** Analytical Lens: UPSC Focus (Mains & Prelims)**

• Conceptual Basis: The legal framework for India’s food security is the National Food Security Act (NFSA), 2013, which mandates the provision of subsidized food grains to a significant portion of the population. The PLI schemes are policy initiatives under the broader ‘Make in India’ and ‘Aatmanirbhar Bharat’ campaigns.

• UPSC Integration: Connecting the Dots

  • GS Paper 2 (Polity & Governance): Welfare schemes for vulnerable sections (PM-GKAY), issues relating to federalism (states announcing loan waivers vs. RBI’s stance), and the role of government policy in economic development.
  • GS Paper 3 (Economy): Government budgeting (fiscal deficit, revenue vs. capital expenditure), farm subsidies, PDS, industrial policy (PLI scheme), and inclusive growth.
  • GS Paper 3 (Agriculture): Issues related to MSP, agricultural marketing, and farm distress.

• Future Impact & Policy Relevance: The central tension for Indian economic policy will be balancing welfare commitments with fiscal prudence and growth-oriented reforms. The success of the PLI scheme will be pivotal in determining India’s ability to create well-paid jobs for its youth and reduce its trade deficit. The long-term trajectory will depend on whether India can transition from an ‘assembly’ hub to a genuine ‘manufacturing and innovation’ hub, while simultaneously reforming its subsidy architecture to make it more targeted and efficient.

• Prelims Practice Question (MCQ):

  Which of the following statements regarding the National Food Security Act (NFSA), 2013 is correct?

  a) It provides a legal right to free food grains for 100% of the rural population. b) It mandates the provision of 10 kg of food grains per person per month to priority households. c) The Act designates the eldest woman of the household (18 years or above) to be the head of the household for the purpose of issuing ration cards. d) The identification of eligible households is done exclusively by the Central Government.

  Explanation: The correct answer is (c). Section 13 of the NFSA, 2013, mandates that the eldest woman who is not less than eighteen years of age in every eligible household shall be the head of the household for the purpose of issue of ration cards. Option (a) is incorrect as it covers up to 75% of the rural and 50% of the urban population. Option (b) is incorrect as the entitlement for priority households is 5 kg per person per month. Option (d) is incorrect as the identification of eligible households is the responsibility of State Governments.

• Mains Sample Question (15 Marks):

  The Production Linked Incentive (PLI) scheme is seen as a strategic evolution from the ‘Assemble in India’ concept to make India a global manufacturing powerhouse. Critically analyze the successes and challenges of the PLI scheme, suggesting measures to enhance its effectiveness in fostering deep-rooted industrial capabilities.

Mind Map Outline (Revision Structure)

• Reforming India’s Economic Governance
  • I. Critique of Legacy Interventions
    • A. Public Distribution System (PDS) & Food Security
      • Traditional Model: FCI-led procurement and distribution.
      • Proposed Reforms: Shanta Kumar Committee recommendations (Cash transfers, reduced coverage).
      • Recent Development (2024-2025): Extension of Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY) until 2028, prioritizing in-kind support over DBT.
    • B. Agricultural Debt Waivers
      • Rationale: Political tool for farm distress.
      • Economic Critique (RBI’s View): Disrupts credit culture, strains state finances, creates moral hazard.
      • Impact: Reduces capital expenditure by states.
  • II. A New Export-Led Growth Strategy
    • A. Conceptual Origin: ‘Assemble in India’
      • Core Idea: Emulate China’s labor-intensive export model.
      • Proposed Strategy: Focus on network products, large-scale assembly.
    • B. Modern Manifestation: The Production Linked Incentive (PLI) Scheme
      • Objective: Boost domestic manufacturing and attract investment.
      • Key Features: Performance-based incentives on incremental sales, coverage of 14 sectors.
      • Latest Performance (2024-2025): Significant investment realized, major success in electronics (mobile phones), and pharmaceuticals.
      • Challenges: Varies in progress across sectors, risk of focusing on assembly over deep manufacturing.
  • III. Comprehensive Policy Analysis
    • A. Critical Appraisal
      • Challenges: High fiscal cost of welfare, moral hazard of waivers.
      • Opportunities: ‘China+1’ strategy, improving Ease of Doing Business.
    • B. UPSC Analytical Framework
      • Legal Basis: National Food Security Act, 2013.
      • Inter-Topic Linkages: GS-2 (Governance, Federalism), GS-3 (Economy, Agriculture).
      • Practice Questions: Prelims (Fact-based on NFSA), Mains (Analytical on PLI scheme).