Advertisement
Tuesday, Oct 19, 2021
Outlook.com
Outlook.com

Will PLI Schemes Be The Gamechanger For Indian Manufacturing Sector?

The PLI-scheme has two broad components, namely, the Champion OEM Incentive Scheme and Component Champion Incentive Scheme with the former adhering to battery powered vehicles and latter caters to advanced automotive technology components of vehicles

Will PLI Schemes Be The Gamechanger For Indian Manufacturing Sector?
Will PLI Schemes Be The Gamechanger For Indian Manufacturing Sector?
outlookindia.com
2021-09-16T09:34:25+05:30

After announcing production-linked incentive (PLI) schemes for several sectors, the Union government on September 15 announced PLI scheme for the automobile sector, with an outlay of Rs 26,058 crore. The scheme is aimed at incentivizing high-value Advanced Automotive Technology vehicles and products.

The PLI scheme for the automobile and drone industry is part of the overall announcement of PLI schemes for 13 sectors earlier announced in Budget 2021-22, with an outlay of Rs 1.97 lakh crore. The PLI schemes for 13 sectors is expected to bring a minimum additional production approximately worth Rs 37.5 lakh crore over 5 years and additional employment of about one crore in the next five years.

“The incentive structure will encourage industry to make fresh investments for indigenous global supply chain of Advanced Automotive Technology products. It is estimated that over a period of five years, the PLI Scheme for Automobile and Auto Components Industry will lead to fresh investment of over Rs 42,500 crore, incremental production of over Rs 2.3 lakh crore and will create additional employment opportunities of over 7.5 lakh jobs. Further this will increase India’s share in global automotive trade,” the government said in a statement.

The scheme for auto sector is open to existing automotive companies as well as new investors who are currently not in automobile or auto component manufacturing business. The scheme has two components, including Champion OEM Incentive Scheme and Component Champion Incentive Scheme. The Champion OEM Incentive scheme is applicable on battery electric vehicles and hydrogen fuel cell vehicles of all segments. The Component Champion Incentive scheme is applicable on advanced automotive technology components of vehicles, completely knocked down (CKD)/ semi knocked down (SKD) kits, vehicle aggregates of two-wheelers, three-wheelers, passenger vehicles, commercial vehicles and tractors.

"With this PLI support combined with the ACC battery PLI, FAME – II and State EV policies for investment subsidies as well as demand side benefits, EVs in India stand substantially incentivized. Substantially reduced GST rate and corporate tax deductions only add to the overall proposition. The missing links appear to be the charging infrastructure, battery ecosystem and last mile bank finance," Saurabh Kanchan, partner Deloitte India, said.

The often heard criticism about India’s manufacturing sector are low ease of doing business and high cost of doing business, making companies uncompetitive compared to peers in other nations. But the story of the auto sector has been different. Maintaining high import tariff, India was able to attract global companies to invest in the country as well as drive localisation. Thus, the industry was able to become globally competitive and now exports of automobiles and auto components totals about $25 billion even as tariffs have systematically declined. While the big passenger car and two-wheeler makers, and component suppliers all derive a significant part of their revenue from exports, the sector is also able to attract newer players.

Take the case of Korean carmaker Kia Motors. The company invested $2 billion over the past three years to set up its operations in India even as India’s car market was in a cyclical slowdown. Tae-Jin Park, chief sales and business strategy officer, Kia Motors India, told Outlook Business earlier: “India is not only an excellent manufacturing destination but also a potential export hub for automobiles, given a large pool of quality labour and the geographical advantage.” Now, in addition to the domestic market, Kia is exporting made-in-India vehicles to over 70 countries.

Currently, in automobiles and auto components, India’s share in gross value addition among Asian exporters stands at 18%, a notch below Vietnam which is the lowest cost country in this value chain at 21%. Barring pharmaceuticals and specialty chemicals, where India has a lead, it does not truly dominate in any value chain.

“Taking a cue from how other countries such as Indonesia and Vietnam have built their competitiveness, India has the potential to increase value add 3x by focusing on end-product quality and branding, greater localisation of end-to-end value chain, and sharp focus on competitiveness of exports,” Suvojoy Sengupta, partner, McKinsey & Co told Outlook Business in an earlier interview. And the PLI scheme aims to boost this competitiveness.

Beyond the auto sector, for Indian manufacturing to take its seat at the global table, are PLI schemes enough?

Except Vietnam, where wages are about 10% lower, India continues to have the advantage of cheap labour but lags far behind in productivity. China is 3x costly and other countries such as Indonesia and Thailand also have higher wages. Compared with India, manufacturing productivity in Indonesia is 2x high; in China and South Korea, productivity is 4x higher, according to McKinsey data.

Apart from upskilling the workforce and transitioning to more value-added categories, domestic companies will have to work on building scale and trustworthiness. In fact, at the heart of the problem facing Indian manufacturing companies is return on capital. Money begets money, which means, unless you are profitable, you cannot power growth. And unless you invest and build scale, you cannot be globally competitive and sustain a profitable enterprise. Unfortunately, most companies in Indian manufacturing struggle to earn a return more than their cost of capital. According to McKinsey, over the past four years, from 2016 to 2020, sectors that saw healthier return saw an increase in invested capital; but out of the top 1,000 manufacturing companies, 700 earned a return that was less than their cost of capital in 2018.

Partly, the low return is from structural factors such as high cost of credit, power and infrastructure, and inefficient logistics, all of which escalate operating expenses — these are what the government now is compensating for through the PLI scheme. But the other big reason is the lack of scale. “The small, fragmented companies that make up some value chains cannot operate productively, let alone at peak efficiency; cannot innovate quickly enough to keep up with competitors; and cannot command price premium because they lack strong brands,” noted Sengupta.

Overall, the government has a long to-do list to work through and companies, a shorter one, before India becomes a compelling manufacturing destination. Considering the lead China has established and how other competing nations have grown in specific value chains, existing spaces are extremely competitive and taken. Snatching away share from others will be challenging, since every export-oriented nation not only wants to protect its own turf, but also wants a piece of the slice China may yield.

Sure, the PLI scheme is a good start to gain ground in manufacturing, but it will only buy us some transition time. That done, India will need more than an incentive scheme to look appealing and that means more fundamental change on the ground.

Advertisement

Outlook Newsletters

Advertisement
Advertisement
Advertisement

Read More from Outlook

Kashmir Civilian Killings: Panicky Migrant Workers Start Leaving Valley

Kashmir Civilian Killings: Panicky Migrant Workers Start Leaving Valley

Some workers shifted to safer localities after militants kill two more labourers from Bihar.

‘Rail Roko’ Hits Railway Operations in Punjab And Haryana

‘Rail Roko’ Hits Railway Operations in Punjab And Haryana

Protest called by SKM demanding removal of Union MoS (home) Ajay Mishra goes on peacefully, commuters affected.

No CSK Without Dhoni, No Dhoni Without CSK: N. Srinivasan

No CSK Without Dhoni, No Dhoni Without CSK: N. Srinivasan

MS Dhoni, last week, led Chennai Super Kings to its fourth Indian Premier League title in Dubai beating Kolkata Knight Riders in the final.

Former US Secretary Of State Colin Powell Dies Due To Covid-19 Complications

Former US Secretary Of State Colin Powell Dies Due To Covid-19 Complications

Colin Powell, who served Democratic and Republican presidents in war and peace, succumbed to Covid-19 complications at the age of 84, his family said.

Advertisement