The PLI plan for our automotive sector can accelerate its success

Synopsis: The new PLI scheme will incentivize the industry to move into higher-value-added technologies and thus spur sectoral growth

Introduction

The Union Cabinet has decided on a major new production-linked incentive (PLI) scheme aimed at reviving and transforming the automotive sector in India.

The planned outlay of government funds for the scheme is in excess of Rs 26,000 crore.

There are two aspects to the scheme. One targeted at original equipment manufacturers and the other at the component’s ecosystem. The OEM scheme focuses in particular on electric vehicles and those powered by hydrogen fuel cells.

What are the issues and challenges of the automotive industry?

Reduced demand due to the Pandemic: Like with other sectors, covid has caused immense damage to the automotive sector. Besides, factors like a cyclical downturn, Bharat Stage VI transition and supply-chain disruptions having made conditions even more severe.

Geopolitical issues: Although signs of recovery are now clearly visible, ongoing global supply disruptions, particularly of semiconductors, threaten to dampen the revival of this sector.

Low export growth: While India’s automotive exports are about $27 billion, or about 8% of total exports, in the context of global automotive trade, there exists vast room for growth. India’s current auto-component exports comprise a mere 1% of their global trade.

Dependence on Imports: There remain technologies and parts that are either not made in India or for which we haven’t matched the global scale, prices or quality needed. For instance, of our top 12 import categories, drive transmission and steering units, engines, electricals and electronics account for 62%, with most imports from China.

Low levels of localization in evolving technologies: such as e-vehicles, unless we act now, the Indian industry would be at threat of losing competitiveness and lagging rivals.

Cost disadvantages in various automotive technologies: hampering our Industry to be globally competitive.

How the PLI scheme will help the Indian automotive industry?

Focus on Startups: Given the role of startups and new technology players in the automotive space, this scheme covers not only existing auto original equipment and component makers, but also new non-auto investors.

Inclusivity: The PLI criteria for eligibility, offers all companies an equal opportunity, irrespective of their size, area of operation or country of incorporation.

Reduce Import dependence: The approach adopted is to target advanced-tech components that currently show high import intensity with usage across all vehicles. Further, it has also built-in flexibility for the inclusion of more technologies.

Pollution mitigation: The OEM scheme attempts to mobilise demand in the direction of zero-emission vehicles, especially the FAME-II scheme. This will help in transformation of the automotive sector towards zero-emission vehicles

What are the changes needed in the PLI schemes to make it more effective?

Firstly, the PLI schemes thrust towards zero-emission sector has not attracted support from automotive industry. Perhaps the government must once again revisit its timetable for the tighter regulation of emissions if market conditions are to be changed sufficiently to induce additional investment.

Secondly, the PLI scheme focuses on advanced component manufacturing. However, there is an issue of the availability of skilled labour that needs to be addressed.

Thirdly, using taxes to provide incentives for the private sector in order to minimise imports is but steps away from the full-fledged licence-permit raj. The purpose of industrial and trade policy must be to integrate further with global value chains, not to dissociate from them. Dissociation from global supply chains will leave the private sector unproductive, drain the public exchequer, hurt consumer welfare.

What is the way forward?

Now the automotive industry must step up and invest in future technologies, advanced manufacturing and improving their processes as well as skilling their workforce, to bolster India’s integration with global value chains.

Source: This post is based on the article “The PLI plan for our automotive sector can accelerate its success” published in Livemint & “Another industrial policy misstep” published in Business Standard on 17^th Sep 2021.