The much-awaited PLI scheme for the automobile industry was approved by the Cabinet on September 15, 2021, with a trimmed budgetary outlay of Rs 26,058 crore. The scheme is expected to provide impetus to the industry that has been grappling with lower volumes over the last couple of years.
The Indian automotive industry is largely dominated by players specializing in conventional fuel models, known as ICE vehicles—which are propelled by an Internal Combustion Engine. The adaption to newer technologies has witnessed slower growth until now, since advanced and sophisticated technologies have been mostly limited to high-end vehicle models.
With the recent automotive PLI (production-linked incentive) policy, India has attempted to foray into the high value Advanced Automotive Technology vehicles and components space. Larger themes under the automotive PLI appear to be—reduction in import dependencies, localization of superior technologies, wider adoption across segments, affordability for India market and projecting India as an export hub.
The policy has two segments, one covering OEMs or original equipment manufacturers for Battery Electric Vehicles and Hydrogen Fuel Cell Vehicles of all segments and the second, covering component manufacturers in the Advanced Automotive Technology space, such as advanced driver assistance, sophisticated braking technology components etc.
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On the vehicles side, the automotive PLI policy addresses investment as well as the supply side push for Battery Electric Vehicles and Hydrogen Fuel Cell Vehicles of all segments. This has also been supported by the state incentives available under the state industrial policies. However, consumer readiness for switching from conventional models to these models will play a critical role in determining the domestic demand.
This could be supported by incentives available on the demand side, such as FAME-II as well as multiple state EV policies such as those in Maharashtra, Gujarat and Delhi that provide subsidies to end customers on purchase of EVs. This coupled with corporate tax deductions and lower GST rates may aid in creating a demand side push. However, core to addressing demand side concerns are the next areas of focus in aspects such as vehicle charging infrastructure, battery ecosystem for longer range technologies and bank finance facilities for purchase of these vehicles.
On the components side, the coverage of components under the Advanced Automotive Technology are yet to be notified for scheme eligibility. The push to components industry will certainly add to the effectiveness of the scheme in terms of attracting investors for creating new/additional capacities. Overall, this could possibly lead to a boost for global suppliers to set up in India, as well as for domestic companies for infusing additional investment. This would help in catering to domestic demand and in time to scale up to export market as well.
Interestingly, India itself presents a substantial demand on the automotive front. Thus, global as well as Indian companies could be well incentivized for setting up capacities in the country for catering to domestic demand and for a larger global play in the future. The wide coverage of the scheme, including all passenger vehicles, Completely Knocked Down (CKD)/Semi Knocked Down (SKD) kits, two-wheelers, three-wheelers, commercial vehicles and tractors in its ambit, may ensure wider opportunities for a larger base. Eventually, the growing demand in international markets could help in absorbing some of the production capacities which would be created in India as an outcome of the PLI support.
In an overall assessment, with the incentives available on the sales and demand side coupled by the significant demand within the country, if the scheme is successful in creating capacities, then job creation in this sector is also imminent. Additionally, this may also induce job gains in allied areas such as battery manufacturing, electrical parts and machinery, charging station infrastructure etc.
The tenure of the scheme has been pegged at five years presently. From global trends, it can be observed that the shift to electrification or to zero-emission vehicles usually spans over 10 to 20 years, raising the question if five years would be a sufficient target for India.
This would be evidenced by the penetration of these vehicles as well as components during the initial years. In the event of a low pick-up in demand, it will be important to see the quantum of incentives being utilized in the initial five years. One can only hope that the situation of large capitalization with low utilization does not arise, given the early phase of the EV product cycle. It would be prudent if the scheme provides flexibility depending upon the performance during the initial years of the scheme.
To sum up, the automotive PLI scheme is undoubtedly a big push and clear articulation of policy and intent by the government in this direction. It would be prudent for all stakeholders to review, monitor and recalibrate the scheme in terms of participation, levels of utilization etc. as the universe around electric vehicles will continue to evolve over the years to come.
Saurabh Kanchan is Partner, Deloitte India. The views expressed in this article are those of the author and do not represent the stand of this publication.
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