By Sukhpal Singh
The Indian government has announced the PLI scheme last year to promote its Atmanirbhar Bharat campaign. The automobile and auto component sector are two segments that received major chunks of the total allocation. How the automobile and auto component industry are thriving to be self-reliant backed by the PLI scheme.
No country is ever successful in the long term… without a really strong and vibrant manufacturing base.~Alan Mulally, American aerospace engineer and manufacturing executive, former President and CEO of the Ford Motor Company
The manufacturing sector is crucial for the employment generation and development of an economy. The manufacturing sector also holds a key position in the Indian economy and the Government has time and again undertook several initiatives such as National Manufacturing Policy (NMP), 2011 and Make in India,2014to boost the manufacturing sector’s growth and to create millions of manufacturing jobs in the economy, with an intent to increase the contribution of the manufacturing sector to total GDP and create a resilient economy to thwart any challenges occurring in Global economy.
Further, the advent of the pandemic, in the form of Covid-19 has made us realise our undue dependence on imports and thus there is a serious need to become Atmanirbhar, particularly in the manufacturing sector.
Accordingly, in November 2020, with the view to create an Atamnirbhar Bharat, and in order to enhance India’s Manufacturing Capabilities while boosting exports, the Union Cabinet chaired by the Prime Minister, Shri Narendra Modi, has given its approval to introduce the Production-Linked Incentive (PLI) Scheme for the 10 key sectors, including Automobiles & Auto Components sector in addition to the already successfully implemented the PLI scheme for Telecom, Mobile phones and Pharma sector.
The automobiles and auto components sector accounts for over 7.1% of the nation’s GDP, 27% of industrial GDP and 49% of manufacturing GDP.
The automobiles and auto components sector, which accounts for over 7.1% of the nation’s GDP, 27% of industrial GDP and 49% of manufacturing GDP, is one of the largest employers and provides about 37 million direct and indirect jobs and thus the importance of this sector can never be over-emphasized.
Auto sector has been granted the largest budget outlay of Rs 57,042 crores for incentives out of the total PLI scheme of 1.97 lakhs crores.
While the sector is going through a hiatus owing to the pandemic and under the impact of the economic slowdown, this announcement of PLI is being welcomed and seen as a required boost to keep the industry afloat in these challenging times and the capability to make India, an export hub in near future. The said objective also reflects the fact that the auto sector has been granted the largest budget outlay of Rs 57,042 crores for incentives out of the total budget outlay of 1.97 lakh crores. The Department of Heavy Industries, Government of India would be responsible for the implementation of the scheme related to the Auto Sector.
The above incentive would be extended to the eligible applicants manufacturing eligible products subject to satisfaction of the eligibility criteria as may be prescribed in the scheme. Further, it will be interesting to see how the policy would be drafted so as to include every stakeholder including the MSME and the EV manufacturers.
As the schemes are introduced under the motto of Atamnirbhar Bharat, the PLI scheme for the auto sector is expected to have special provisions related to:
- Import substitution
- Promotion of exports
- Employment creation
- Promotion of MSMEs
- Special incentives for electric vehicle and component manufactures
- Incentive for adoption of new technology and reduced pollution
The automobile component industry’s revenue stood at $49.3 billion in FY20, up from $39.05 billion in FY16 and is expected to reach $200 billion by FY26. Export of auto components grew at a CAGR of 7.6% to reach Rs 102,623 crore ($14.5 billion) during the same time.
As per Automobile Component Manufacturers Association (ACMA), automobile components export from India is expected to reach $80 billion by 2026. The Indian auto components industry is expected to reach $200 billion in revenue by 2026.
The above projections can also be backed by the various Government initiatives and policy support which apart from this PLI scheme, includes:
- National Electric Mobility Mission Plan (NEMMP) 2020: The vision of this scheme is for fasteradoption of EVs and their manufacturing in the country.It aims at achieving sales of 6-7 million units of hybrid and EVs by 2020.
- National Automotive Testing and R&D Infrastructure Project (NATRIP) centres: Strong support for R&D and product development by establishing NATRIP centresat a total cost of $388.5 million to enable the industry to adopt & implement global performancestandards.
- Automotive Mission Plan 2016-26 (AMP 2026): AMP 2026 targets a four-fold growth in the automobile sector in India, which includes manufacturers of automobiles, auto components & tractors over the next 10 years. It is expected to generate an additional employment of 65 million.
- FAME Scheme: Aimed at incentivising all vehicle segments – two wheelers, three wheelers, four wheelers, LCVs and buses. It covers hybrid & electric technologies like Mild Hybrid, Strong Hybrid, Plug in Hybrid & Battery Electric Vehicles.
- Vehicle scrappage policy: Aimed at creating an Eco-System for phasing out of Unfit and Polluting Vehicles and provide strong incentives to owners of old vehicles to scrap old and unfit vehicles through registered scrapping centres.
PLI Scheme, when coupled with the above initiatives draws a promising picture about the industry future. Not only these, but the incentives under the PLI scheme would also be in addition to the incentives packages offered by the States, allowing them to recoup approximately 30%-100% of their investment. These usually comprise of:
- Capital linked incentives with subsidy as a percentage of investment
- Expenditure linked incentives like power tariff subsidies, stamp duty reimbursement
- Sales linked incentives like SGST reimbursement, turnover based subsidy
- States also offer significant investments (‘mega’ units) customized incentives packages.
Investors can avail themselves incentives from both the centre and the state simultaneously. The central government also attempts to provide financial relief to the industry through measures like duty scrips on foreign trade transactions and reduced corporate tax rates.
Therefore, investors should extensively evaluate and pursue all incentives avenues to benefit from the holistic support intended by the government.
From above this is evident that the implementation of this policy would lead to an increase in the investment and output in the automobile industry while utilizing the country’s ample human capital for the prospective manpower requirements.
Launched under the Atmanirbhar Bharat initiative, this announcement comes at an opportune time when global investors are considering diversifying their manufacturing presence outside China (popularly called China plus one strategy).
All in all, the intent is to make India globally competitive and would automatically make localization work. Further, with the approval of the PLI scheme for ACC battery manufacturers with a total outlay of Rs 18,100 crores, India is poised to become one of the biggest electric vehicle (EV) markets when coupled with the PLI scheme for the automobiles and auto components sector.
Since the success of these initiatives hinges on their implementation, the government should ensure swift approvals with timely appraisal and disbursal of funds, for all such schemes.
(Sukhpal Singh is a Senior Manager with indirect tax practice of Ernst & Young and is a part of the Infrastructure, Industrial & Consumer Products unit.)
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