The automotive sector is an extensive contributor to the Indian economy. India is expected to be the world's third-largest automotive market in terms of volume by 2026. The country also holds a strong position in the international heavy vehicle arena being the largest tractor manufacturer, second-largest bus manufacturer and third-largest heavy trucks manufacturer in the world. With 7.1% share in India's GDP, 40% share in global research and development and 4.3% in export, the sector2 holds significant importance in building a self-reliant India (Atmanirbhar Bharat).
In a bid to make the sector more competitive and enhance its global reach, the Government of India, in its Production Linked Incentive (PLI) scheme, allocated the biggest chunk of INR 57,042 crore to the 'automobiles and auto components' sector. The PLI scheme was launched by the government in March 2020 to provide incentives on specified products manufactured in India, boost domestic manufacturing and cut down on import bills. The scheme aims to encourage domestic companies to set up or expand existing manufacturing units. Through the scheme, the government aims to bolster growth in capital intensive sectors (such as auto, pharma, electronics, food processing) as they generate employment and add to the revenues.
COVID-19 impact and scope of the PLI scheme
The auto sector has been one of the adversely affected sectors during the pandemic. While the sales have been lowest in the last 20 years, there has also been a dip in the volume of both the new-vehicles and used-vehicles industries. However, despite a sluggish market environment in the financial year2020-21, overall automobile exports grew 56.55% in March 20213 and the scheme would be instrumental in reviving the growth potential of the sector.
The PLI scheme for the auto sector is interlinked with the scheme for Advance Chemistry Cell (ACC) battery storage. With the cabinet approving the scheme for ACC battery storage production in May 2021, the government has set its sight on making India more environment-friendly and slowly phase out petrol and diesel-based vehicles. Incentives under the ACC battery accompanied with the scheme on auto sector will reduce the cost of manufacturing electric vehicles and thus, make it affordable for a large segment of the population. India's EV market is estimated to be an INR 50,000 crore (USD 7.09 billion) opportunity by2025, with two-wheelers and three-wheelers expected to drive higher electrification of the vehicles.
As the government finalises the nuances of the scheme, it appears from the information available in public domain that there would be strict eligibility criteria for the eligible companies. The scheme for the sector is likely to comprise of the following sub-schemes and companies will be eligible to apply for a maximum of three of these schemes:
- Sourcing incentive scheme with probable outlay of around INR 7,210 crore is expected to incentivise international purchase offices for component sourcing.
- Champion OEM incentive scheme with probable outlay of INR 18,075 crore would provide incentives based on sales value for all auto original equipment manufacturers (OEMs).
- Logistics cost incentive scheme is anticipated to have the biggest outlay with INR 23,628 crore and provide sales-based incentives to offset logistics costs.
- Component champion incentive scheme would focus on giving out incentives on the auto component sales based on incremental sales achieved by the manufacturers. This sub-scheme is likely to get INR 8,129 crore out of the total budget allocated to the sector.
Maximum incentive per applicant is expected to be capped at INR 8,556crore and incentive rates may range from 2-12% of the incremental sales/revenue depending on the product category and the sub scheme. Reports suggest that under the Automotive Champion scheme, a company would qualify for the PLI only if it has a revenue of INR 1000 crore (INR 100 crore for component makers) from overseas operations, INR 10,000 crore overall revenue (INR 500 crore for component makers) and global investment of INR 3000 crore (INR 150 crore for component makers). All the three criteria will be required for a company to qualify for automotive champions that will offer them maximum incentives in the form of cash backs on incremental sales.
The government expects the following from the scheme -
- Additional sales of INR 409,501 crore including MSME revenue of INR 248,200 crore
- Additional investment of INR 102,722crore
- Additional GST collections of INR 12,686 crore
- Additional direct tax collections of INR 16,525 crore
- Additional employment of 58.84 lakh, including 24 lakh in MSME
Roadblocks for the scheme
In the process of creating global manufacturing hubs, the PLI scheme seems more favourable to large entities with huge domestic and export turnover. For the entities yet to establish their presence in themarket, it would be difficult to fit into the strict eligibility criteria of the scheme.
The PLI schemes rolled out till date (such as pharma and food processing) have not provided any room for the new entities for filing application. Considering the budget constraints, the scheme will be able to absorb only major players of the industry with limited product coverage. This low product coverage coupled with strict eligibility in terms of global investment and revenues would add to the already mounting controversies around the scheme.
Questions industry seeks clarity on
While the scheme still awaits approval from the Cabinet, the Department of Heavy Industry should come up with draft guidelines in public domain after deep diving into the following issues raised by the industry:
- Whether joint venture would be an eligible applicant for applying for incentive under the scheme?
- Whether the manufacturing of a component that is currently being imported would be considered for computing incremental investment and consequently incremental sale?
- What is the indicative list of eligible and ineligible expenditure for computation of committed investment?
- Whether there would be separate PLI norms for new companies planning to engage in auto manufacturing?
- Whether brown field investment would be considered as an eligible investment under the scheme?
- What are the expected components/products that would be eligible to receive incentives under the scheme?
The industry has huge expectations from the PLI scheme. The companies, with an investment plan in hand, must approach the Ministry to make representation for inclusion of their product under the scheme. Further, it is imperative to prepare the sales and growth projections, which lie at the heart of the scheme, beforehand to avoid any last-minute delays in filing applications.
The basic preliminary information requirement list under the scheme would be similar to those provided in the other PLI schemes such as basic company details (memorandum of association, article of association, incorporation certificate, shareholding pattern etc.) and financial details (annual reports, audited financial statements, sources of fund and projections).If the documents are in place at the outset, the applicant could then focus on finalizing their projections in line with the guidelines of the scheme.
If the government can find a way to work out the challenges highlighted above, it will herald a new path for the Indian automotive and auto components sector.
The article was published on Taxmann.