By Parul Nagpal and Ish Kapoor
The Indian auto industry has been facing several headwinds and a well-planned implementation of the PLI scheme can help the sector with a much-required boost.
India with its huge population is an attractive destination for the automobile industry and thus making it the 4th largest in the world. India has a robust automotive industry that ranges from two-wheelers to four-wheelers as well as a presence in varieties of commercial vehicles and is now heading towards electrification, albeit slowly. The total turnover of the Indian Automobile Industry during FY 2018-19 was around USD 118 Bn, which is 7.1% of the country’s total GDP, 27% of industrial GDP and 49% of manufacturing GDP.
Further, the Automobile Industry is one of the largest employers as it provides around 37 million direct and indirect jobs. The facts clearly show that the automobile industry shows great promise and plays an important part in the GDP of a growing economy like India.
The automobile industry has been seeing a downfall since the COVID time last year with the sales in March 2020 hitting a long time low when they slumped by 45% as compared to March 2019. The decline was across all sectors, i.e., passenger vehicles, commercial vehicles, two-wheelers and three-wheelers. Considering the unending importance of the automobile sector in the Indian economy and the fact that the industry did face a tough time during the COVID-19 in India, the government brought in the PLI scheme to incentivize the automobile sector.
The allocated outlay of incentives to the tune of INR 25,938 crores under the auto PLI scheme is the largest among all other sectors. The beneficiaries under the scheme would include both i.e., Auto OE manufacturers and Auto components manufacturers as well.
The incentives in the case of Auto OEMs are applicable only for manufacturers of Battery Electric Vehicles and Hydrogen fuel cell vehicles of all segments whereas no such restriction has been laid down for component manufacturers.
Another objective behind introducing the said scheme is to boost manufacturing and export from India with a specific focus on increasing investment along with the potential for generating huge employment opportunities across the automobile sector.
Currently, in order to qualify for claiming the incentives under the PLI scheme, the companies would have to fulfil the eligibility criteria laid down under the scheme. The eligibility criteria are three-fold:
- Have specified group turnover and fixed asset as on 31 March 2021
- To achieve minimum year-on-year threshold investment in fixed assets
- To meet the year-on-year sales threshold.
These thresholds vary for various categories of auto OEMs and component manufacturers.
Speaking about the incentives under the policy, the notified policy for Auto OEM has provided incentives in the range of 13-16% of determining sales value with an additional 2% wherein cumulative determined sales value is over 10,000 crores over 5 years. Whereasincentives for the component manufacturer is in the range of 8-11% of determining sales value. Further, there is an additional 2% for achieving a determined sales value of above 1,250 crores over 5 years and an additional 5% for components manufactured for battery vehicles and Hydrogen fuel cells.
Since the time, the policy has been notified there has been a positive wave within the industry and it has been welcomed by the industry players. The government has notified the Industrial Finance Corporation of India (‘IFCI’) as the project management agency for the policy and has issued FAQ’sas well providing clarity on various aspects of the policy.
For the auto component manufacturers, the government had notified a list of items falling under Advance Automotive Technology (‘AAT’) for which incentives shall be available and post-release of the list the government received requests from various industry players to add certain products in the list. The government took the same positive and it is expected that soon another list would be notified thus expanding the range of products on which incentives shall be available to component manufacturers.
However, it is pertinent to note that one of the main aspects laid down in the policy is that minimum 50% value addition is to be achieved for the products on which benefit is to be claimed. In other words, the company applying for the incentive will be required to establish that they have added 50% domestic value to the product before claiming the same as an incentive. It has been seen that considering the current overall industry scenario, many industry players are facing challenges in meeting the said criteria for the products.
The main idea behind introducing the value addition criteria is to increase localisation which will provide a trickle-down effect to various small players in the supply chain. It will also help government make India an export hub in the global auto supply chain. Further, additional incentives being provided for EV or Hydrogen fuel cells clearly shows the government’s intention to move towards energy-efficient options benefiting society as a whole.
In wake of the industry representations, the govt asked for applications from interested industry players earlier this month on 9th Jan 2021, wherein 100 plus applicants showed interest. The IFCI will scrutinize the applications and communicate selection basis the above mentioned three-fold criteria. Since the list of AAT components is under process, the applicants have been given the liberty to modify the AAT components later as well.
All in all, it is expected that the introduction of the PLI scheme under the auto sector will surely give a much-needed boost to the said sector and the government can surely achieve its long-term objective of investment and job creation, subject to the condition that the scheme is implemented effectively, and incentives are disbursed on time to the eligible companies.
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(Parul Nagpal is a Director with Indirect Tax practice of Ernst & Young and is a part of the Infrastructure, Industrial & Consumer Products unit. Ish Kapoor is Manager at EY.)
(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)