In 2021, when the Indian government came up with a production-linked incentive (PLI) scheme for the automotive sector, the industry and as well as industry-watchers were left surprised. After all, India is already among the top 10 automotive exporters in the world. The country exports almost as many automotive parts as it imports.
What prompted the government to give the industry a push were the advancements being made by automotive manufacturers in China and South Korea. The two countries had invested heavily in technology and the Union government was clear that it did not want the industry to be taken over by them.
Consequently, India earmarked Rs 25,938 crore in incentives to automotive manufacturers to help them rise to the challenge. The goal was to boost the manufacturing of advanced automotive technology (AAT) — the kind of technology that powers self-driven cars, helps vehicles run on renewables and allows manufacturing through cutting-edge techniques such as 3-D printing.
Upon launching the PLI scheme, the Union Ministry of Heavy Industries said the scheme will promote “deep localisation” for AAT products and lead to the creation of domestic as well as global supply chains.
But three years on, the gains from the automotive PLI scheme have been few and far between. An arduous documentation process coupled with the steep eligibility requirements has meant few manufacturers have been able to secure the incentive. The scheme had attracted a proposed investment of Rs 67,690 crore since its launch. Of this, just about 19 per cent, around Rs 13,037 crore was spent until December 2023.
An official review of the entire PLI programme covering 14 sectors showed a slowdown in investment in the automotive sector. The government anticipated an investment of Rs 16,823 crore by the end of financial year 2024. But in the nine months of the financial year, only Rs 4,139 crore worth investments were made, the official review showed.
Experts attribute the lag in investments to the stringent design of the scheme. Aaron Solomon, a managing partner at the law firm Solomon & Co., says participants have been facing difficulties from qualification to stringent eligibility criteria. He says there was a lack of clarity among stakeholders since the policy was introduced.
When the scheme was rolled out, industry players were confused about the timeline and the disbursement of incentives. After industry players sought clarity, the government, at the beginning of 2024, extended the scheme till the end of the 2028 financial year. The government did try to address the confusion within industry but did not make any significant changes to the eligibility criteria or the documentation process.
Asking for Too Much?
Expansion of manufacturing capacity takes time. Add to that the requirement of Indian automotive businesses to provide at least 50 per cent domestic value addition (DVA) to the product and the supply chain. Not many companies have been able to make the cut. “Many of the companies that have been selected under the [PLI] scheme are struggling to design products that can meet the eligibility criteria of 50 per cent local value addition,” says Akshay Jain, a partner at law firm Saraf and Partners.
Automotive manufacturers have asked the government to spread the 50 per cent DVA criteria over five years. But the government has refused. “The scheme was announced with a certain criterion. You cannot change the criteria midway. If we did, we would be changing goalposts, and that would not be fair,” Rajesh Kumar Singh, secretary, Department for Promotion of Industry and Internal Trade (DPIIT), told Outlook Business in a recent interview.
An industry source who did not wish to be named says many applicants under the PLI scheme have been rejected or not been certified because some of these manufacturers have their value chains sitting in China and Taiwan. “This time they (the government) designed the scheme very well. The purpose is to not let the money go to China from the backdoor,” the source says.
One of the key objectives of the scheme is to cut India’s import dependence for auto parts. This is important because manufacturing for some components in the automobile sector is largely concentrated within a few jurisdictions globally. For instance, even after the roll-out of the scheme, India’s imports in 2022–23 grew 11 per cent year-on-year, nearly 66 per cent of that increase was concentrated in Asia, especially in China.
Rajesh Sivaswamy, senior partner at King Stubb & Kasiva Advocates and Attorneys, says India is heavily dependent on external supply despite its global presence in the auto space. This, Sivaswamy says, is because countries like Taiwan have 63 per cent share of the semiconductor manufacturing market. “Until India establishes its own capacity, reliance on external sources remains inevitable,” he says.
Survival of the Fittest
The high criteria for domestic value addition have led to only a handful out of 67 automotive parts makers and 18 original equipment manufacturers to get localisation certificates from Automotive Research Association of India (Arai), a government affiliated testing agency and have thus benefited from the PLI scheme.
Documents required to apply for the scheme include audit trails, financial information, production and projection. Additionally, as proof of the domestic value-added criteria, manufacturers must provide documentation of their tier-2 and tier-3 vendors, evidence which most manufacturers have been unable to provide.
“Organisational maturity really helps when you have to prove your data,” says Vivek Vikram Singh, managing director (MD) and group chief executive officer (CEO) of Sona Comstar, an auto component-maker who has received the required certificate. Singh’s company managed to obtain the certificate “because we have everything on an SAP [Systems, Applications and Products] system”. “It is very easy to find documentary proof. Manually it is impossible to provide the rigorous documentation that is required,” he says.
The system in place allows the company to streamline and integrate business processes across various departments within an organisation, including finance, human resources, sales, procurement, manufacturing and more. The reason a company like Sona Comstar obtained the certificate is that it was quickly able to cultivate local suppliers and was already producing for clients abroad. The scheme requires immediate development of supply chains simultaneous to the process of local manufacturing.
The Soma Comstar MD and CEO says the government is trying to see any leakages through stringent processes, which he thinks is completely justified. He says the scheme requires setting up operations within a short time frame because the aim was to take India forward in the global automotive race by bringing in advanced technology and enhancing India’s export potential. He adds that incentives under the PLI scheme are meant to be used for the purpose of research and development and not building up capabilities.
Jain of Saraf and Partners says, “Unless the products can compete globally in terms of quality and technology, the price advantage on account of the incentives may not be sufficient to create a self-sustaining and competitive local supply chain.” Society of Indian Automobile Manufacturers (SIAM) president Vinod Aggarwal says he is hopeful that more companies will get certified in coming months. “If the government is making investments, then the products definitely need to be export worthy,” he says.
The automotive PLI scheme was one that was supposed to help the auto sector bolster India’s rising status as a growing economy. Chinese automobile manufacturing is mounting a challenge to all traditional big players in the sector. With the automobile sector undergoing a tectonic shift, Indian automakers will have to go through a trial by fire.
