The Re-Beginnan | Vol.2 | Issue 32
Revisiting the PLI Scheme: Automobile & Auto Components
What's the deal
In November 2020, India’s finance minister Nirmala Sitharaman extended the PLI Scheme under the Global Champion Scheme to an additional 10 key sectors with a total outlay of INR 1.46 lac crore over 5 years. The PLI scheme benefits companies who commit to incremental revenues over its previous year. It is an important initiative towards providing impetus towards the ambitious goal of a $5-trillion economy. One of the sectors to benefit from this scheme is the Automobile & Auto Components sector (auto sector). The Indian government has been encouraging the sector to localize its sourcing to cut down imports and increase exports. The sector is expected to receive the biggest chunk of subsidies i.e., INR 57,042 crores.
However, over 90% of automakers will not be able to receive these benefits. The subsidies come with their own set of caveats. Let’s take a look at the details of the scheme.
The Scheme and its Pre-requisites
The PLI Scheme is expected to be rolled out on December 31st, 2020. The Global Champion Scheme includes four plans which will accelerate manufacturing in the auto sector. These plans are as follows:
- Global Sourcing Scheme
- Vehicle Champion Scheme
- Component Champion Scheme
- Production-Linked Incentive
According to the draft PLI Scheme, manufacturers are expected to get a cashback of 2%-12% of incremental total revenue and incremental exports revenue. However, with stringent prerequisites only large companies are set to benefit from this. As per the draft, the Global Champion scheme has set eligibility criteria of INR 1,000-crore turnover, INR 200 crore of exports and an investment of INR 350 crore in fixed assets. This criterion ignores most of the Indian companies in the sector. Woefully, as per Auto Component Manufacturers Association (ACMA), in 2018, just 14% of auto component makers had a turnover of more than the stipulated INR 1,000 crore, which were primarily foreign companies or joint ventures with foreign collaborators.
As per the details from the draft, 2%-12% cashback will be given to companies as per their increase in revenue. To receive 2% cashback a company must have minimum incremental domestic sales revenue of INR 75 crore over the previous year. Companies having more than INR 1,000 crore of incremental sales revenue will receive 12% cashback. Hence, big companies are expected to benefit significantly from this, leaving smaller companies on the sidelines. Also, the eligibility criteria to avail export cashback which is 4–7% on additional exports, include the same set of criterion. The minimum cut-off to avail export cashback is 125% of the incremental export turnover or incremental turnover, whichever is lower. The PLI scheme also sets criteria for a good traveller from at least 2,001 km going up to 5,000 km to avail the cashback incentive of 4% to 7%, again excluding small companies from any direct benefit.
To add to this, the PLI scheme also includes an outlay of INR 18,100 crore for EV and battery manufacturers. This outlay is being made primarily for advanced chemistry cell manufacturing. Cell manufacturing set-ups require massive investments and are again an area where small companies cannot participate. Also, despite technology transition in the sector, the government has not focused on incentivizing R&D expenditures with the new scheme.
Closing Note…
While the PLI scheme for the auto sector is largely focused on domestic and local manufacturing, it fails to look at the larger share of manufacturers in the country. Small manufacturers have already faced declining profitability in previous years and will be disappointed to be majorly excluded in the new scheme. Higher orders from big manufacturers may boost the revenue of small manufacturers but eventually will lead to limited growth in comparison to big players. The PLI scheme is yet in the draft stage and it is to be seen whether there are any changes that will be implemented before finalization.
