Critically evaluate whether competitive, milestone-linked capital subsidies are better than output-linked incentives (PLI) for building strategic industrial capacity.

Strategic industries often fail because firms cannot pay to build the first plant. In November 2026 the Union Cabinet approved a ₹2,814 crore CAPEX Support Scheme. It gives a 30% capital subsidy for lithium and nickel processing [1]. This moves away from India's output-linked PLI model, but it is better only in some conditions.

Merits of competitive, milestone-linked capital subsidies

• Targets the real barrier: costly equipment, multi-stage conversion and environmental safeguards make domestic processing "unviable under current market conditions" [1]. PLI pays only after production starts, a stage these firms may never reach.
• Competition cuts fiscal cost: bidders first pass a technical test. They then compete on a least-cost criterion, meaning the lowest subsidy sought [1].
• Milestone discipline: support comes in three tranches tied to investment and equity milestones. Unpaid support tapers if a plant is delayed more than 3 years from the Letter of Award [1].
• Leverage: about ₹10,000 crore of investment is expected against ₹2,814 crore of public money [1].

Limitations

• Pays for capacity, not output: no tranche depends on tonnes produced [1]. A plant can be built and then sit idle if imported refined material stays cheaper.
• Winner's curse: the lowest bidder may be the one that underestimated its costs. Only four plants are planned, and together they add up exactly to the 2030 targets of 60 kt lithium and 100 kt nickel [1]. If one fails, a target is halved.
• Factors outside the subsidy: the Standing Committee on Coal, Mines and Steel found slow clearances and long gaps between auctioning a mine and starting to mine it [2].

Output-linked PLI: strengths and gaps

• Strength: money flows only for actual sales, so idle capacity costs the government nothing.
• Gap: PLI stalls in frontier sectors. Under the ₹18,100 crore ACC battery PLI (2021), no beneficiary had claimed any incentive as of mid-2026. The ministry cited technology gaps and the lack of upstream components [3].

Verdict Neither tool is better everywhere. Capital subsidies suit new, capital-heavy, technology-scarce sectors where getting started is the hurdle. PLI suits mature sectors where scale and cost competitiveness matter more.

In short, capital subsidies build the first plant, and output incentives keep it running. A hybrid model would work best: CAPEX support with a final tranche linked to output, plus faster clearances as the Standing Committee urged [2]. Such a model would build resilient strategic capacity in line with Atmanirbhar Bharat and SDG 9.