Why the auto PLI scheme will not bring early revival | Economic Times

The automobile sector is in reverse gear, according to sales data. Also, it is likely to face headwinds for a while. In that context, the production-linked incentive scheme should have come as a boon for the business. But experts say don’t hold your breath on that hope yet.The auto sector seems to be running out of gas even before the pandemic began. Growth in the automobile industry has largely remained stagnant for a while now. In 2019, the sector faced its worst decline in two decades as a consumption slowdown sharply affected vehicle offtake across segments. Factors such as high GST rates, liquidity crunch and consecutive fuel price hikes also diminished sales. And then Covid began.The sub-optimal performance of the auto sector has been a cause of concern, as this segment is a key driver of economic growth. It contributes nearly 50% to the country’s manufacturing GDP and 7.1% to GDP.The sector might be weighed down for a while. While releasing the sales data for August, the Director General of the Society of Manufacturers of Electric Vehicles (SIAM), Rajesh Menon, had said: “The Indian automobile industry is reeling under pressure due to supply chain challenges. The global semiconductor shortage continues and now it is having an acute impact on output across the auto industry. In addition, high commodity prices are increasing the cost of production.”The numbers he put out showed how bad the situation was: cumulative sales in August 2021 were below the levels seen in 2016-17 in passenger vehicles and lower than the levels seen in 2011-12 in two-wheelers.The sector saw some hope in September when the government approved the much-awaited production-linked incentive (PLI) scheme for automobiles, with a budgetary outlay of Rs 26,058 crore. Estimated to lead to fresh investments of over Rs 42,500 crore over five years, the scheme was seen as something that would fuel growth in a sector showing signs of stagnation. But, going by expert views, the PLI scheme might not give the auto sector the push that everyone is hoping for. 87149949It is a good scheme, says Saurabh Kanchan, Partner at Deloitte India, but it is meant to deliver returns after many years. He says the scheme could have also included a list that covers components of conventional vehicles. “The design and direction of the scheme is right. However, in order to give immediate momentum to the economy and the sector, product coverage for conventional components (the final list is under consideration) could be more broad-based as this segment has good potential for exports as well. Moreover, a lot of conventional-engine components would continue to be used for battery electric vehicles (EVs) as well,” he says.The auto PLI scheme has put more focus on supporting manufacturers of hydrogen fuel cells and EVs.What the Scheme SaysThe programme has two components — the Champion OEM Incentive Scheme, a sales-value linked scheme applicable on battery EVs and hydrogen fuel cell vehicles of all segments; and the Component Champion Incentive Scheme, a sales-value linked scheme applicable on pre-approved advanced automotive technology components of all vehicles, CKD/SKD kits, vehicle aggregates of two-wheelers, three-wheelers, passenger vehicles, commercial vehicles, tractors and automobiles meant for military use.As far as eligibility is concerned, automobile companies investing Rs 2,000 crore into four-wheeler manufacturing and Rs 1,000 crore into two-wheeler manufacturing over a five-year period will make the cut. Automobile original equipment manufacturers (OEMs) will need to have a minimum revenue of Rs 10,000 crore and invest Rs 3,000 crore over the same period. For auto component makers, a minimum revenue of Rs 500 crore and Rs 150 crore of fixed asset investment is the mandate.Aimed at incentivising advanced automotive technologies and products, the scheme hopes to take the lead in higher technology and green automotive manufacturing. A PIB release had stated in September: “This scheme for the automotive sector along — with the already launched PLI schemes for advanced chemistry cell (Rs 18,100 crore) and Faster Adoption of Manufacturing of Electric Vehicles (FAME) (Rs 10,000 crore) — will enable India to leapfrog from traditional fossil fuel-based automobile transportation system to an environmentally cleaner, sustainable, advanced and more efficient EV-based system.” 87149994Industry experts, however, say we need more thought and deliberation on how such futuristic technologies can be implemented in India practically. Also, current issues have to be solved before leaping into new systems.“The OEM industry is already witnessing low-capacity utilisation,” says Deloitte’s Kanchan. “While that is happening in the case of conventional technologies, the expectation is to create significant EV capacities at the same time. The question is what happens to the demand side. How do we get buyers to choose EVs instead of conventional vehicles?”The Fine PrintThough the EV segment has been making rapid strides in the Indian market, recharging infrastructure is still behind the curve. According to SIAM, there were 1,800 charging stations in India as of March for approximately 16,200 electric cars running on the country’s roads. A report by Grant Thornton and FICCI in June estimated India must have 400,000 charging stations to meet the requirement for the two million EVs that could potentially ply on its roads by 2026. The government wants 30% of new vehicle sales to be electric models by 2030.The infrastructure is not ready for EVs to ply smoothly and it should be done over a period of time, says Amit Kothari, Joint MD, Kay Jay Forgings. “Manufacturers do not have a proper vendor base either. The government should not rush it with the electric vehicle industry.”The other worrying aspect relating to adoption of such vehicles is the cost. Polash Das, Head of eMobility, Convergence Energy Services Limited, says India is a cost-sensitive market and reduction in prices is important to ensure EV dreams are fulfilled. “We can do this by investing more in indigenous manufacturing. Second is bringing sticker prices down by giving incentives. Thirdly, we can do aggregation and reduce costs. The effect of such measures will come in 5-10 years, but such a stimulus is required now so that the market can grow in the right direction,” he says. Convergence is a subsidiary of state-owned Energy Efficiency Services Limited.A Problem and OutlookBut some core challenges are clear enough with exclusion being the biggest one in the PLI scheme, argue some experts. The scheme has set a minimum investment of Rs 1,000 crore over five years for two-wheeler players to be eligible. This makes the scheme more tilted towards the larger players and it might keep new entrepreneurs and innovation out, claim industry analysts. 87150013Sumit Chhazed, Co-founder of OTO Capital, a buying and financing platform for two-wheeler EVs, presents another side to the same coin. The scheme is more applicable from a long-term perspective, as the EV sector cannot reap the benefits within a short period. “The key beneficiaries of the scheme are MNCs. However, we can expect startups to collaborate with MNCs wherein both get benefited out of the pact,” he adds.Industry experts also point out that the thrust on the EV segment will give a boost to other business verticals as well. Dhirendra Kulkarni, Senior Director-Presales at Boston-based PTC, says development of connected vehicles will lead to a proliferation of related electronics and software developers, too.A section of the industry is of the view that PLI is more focused on incentivising additional investments and not existing ones. That is why it has no benefits, in particular for internal combustion engine vehicles.Vinnie Mehta, Director General, Automotive Component Manufacturers Association, says it is a tailor-made scheme for creating investments in technologies that the country is deficit in. “The scheme is not designed to give a shot in the arm of the industry or to deal with its woes. It is preparing the industry for the future and creating segments of the value chain that do not exist today. Globally, the industry is getting more complicated and for us to remain relevant, these segments of the value chain would be very critical for the future of the industry,” he adds.Even if the scheme is positioned to be forward looking, more inclusiveness in the scheme can cover smaller players and help improve the overall health of the industry. Especially at a time when it is being bogged down by Covid.(Edited by Ram Mohan)