Ajay Shah: PLI Benefits Few, Urges Systemic Tax Reforms

Ajay Shah, a prominent economist and public policy expert, has raised critical concerns about the long-term effectiveness of the Indian government’s Production-Linked Incentive (PLI) scheme, designed to attract global companies like Apple. While acknowledging the scheme's merits, Shah emphasized that it fails to address deeper, systemic issues within India’s tax and regulatory framework.

Shah explained that the PLI initiative offers selective benefits to a few firms, such as Apple, while neglecting the need for broader tax reforms that could benefit all businesses. “We’re essentially refunding money to Apple that should never have been taken in the first place under a rational indirect tax system,” Shah remarked. He advocated for comprehensive changes to India’s tax laws, stating, “It is the Indian law that needs to change. You should not subsidize the firm; you should fix the law.”

In his analysis, Shah also stressed the importance of learning from international firms and advised India to avoid an ethno-nationalistic approach to foreign investment. “We celebrate Indian firms, and we’re very proud of them, but the best Indian firms are far behind the best global firms. We should be open to learning from the advanced economies,” he noted. Shah believes that by incentivizing global firms to operate in India, the country can benefit from a knowledge transfer that will enhance Indian talent and innovation.

Drawing parallels to the success of India’s IT industry, Shah highlighted how American multinational Texas Instruments played a key role in seeding the industry in the 1980s. “Ultimately, that knowledge percolated, and tech companies sprung up across the Indian landscape,” he said, emphasizing the value of work visas and expat talent in fueling India’s growth journey. “When an Indian firm brings in someone from abroad, it’s because they have special knowledge, and that knowledge seeds the Indian landscape.”

On competing with China, Shah offered a stern warning, analyzing what he called an impending macroeconomic collapse in China due to Xi Jinping’s concentration of power. He pointed out that since 2018, China has been grappling with “zombie firms and zombie banks” alongside massive real estate overdevelopment. According to Shah, China’s economic troubles stem from a reversal of Deng Xiaoping’s efforts to create a more open political system, leading to a decline in the rule of law and private sector optimism. “Xi Jinping went into an arrogant nationalism by taking on the West,” Shah noted, urging India to avoid similar pitfalls.

Shah concluded by cautioning against using national security concerns to distort economic growth, urging the Indian government to focus on achieving 8% GDP growth as the best foreign policy strategy.