At a recent virtual Industry event, NITI Aayog CEO Amitabh Kant said that production-linked incentive (PLI) scheme for key sectors has the potential to add USD 520 billion worth of manufacturing in the next five years.
Under the scheme, there are four plans for the automotive sector: Global sourcing scheme Vehicle Champion Scheme, Component Champion Scheme, and Production- Linked Incentive Scheme. According to sources, under the plan, the manufacturers are expected to get a cashback between 2% and 12% of the incremental sales revenue and incremental exports revenue.
The scheme, expected to be rolled out on December 31, 2020, will undoubtedly accelerate automotive manufacturing, but it may end up helping only the big fishes.
The details of the draft of the Global Champion Scheme for the automotive sector, PLI is also a part of the scheme, indicating that the eligibility criteria for the cashback incentives mostly favour the big companies. The policy ignores the micro small and medium enterprises (MSMEs), especially the USD 49-billion (FY20) auto component industry, which had a massive drop from USD 57 billion in FY19.
The bigger the better
The Global Champion scheme has laid out strict eligibility criteria of INR 1,000-crore turnover, INR 200 crore of exports and investment of INR 350 crore in fixed assets. These criteria sideline most of the Indian companies. According to a report released by the Auto Component Manufacturers Association (ACMA), in 2018, only about 14% of the auto component makers had a turnover of more than INR 1,000 crore. They were primarily dominated by foreign companies or joint ventures with foreign collaborators.
Unfortunately, over 90% of the companies owned by Indian promoters fall below the cut-off revenue of INR 1,000 crore.
I
The big manufacturers may enhance sourcing from the smaller firms to up their revenue. This may create some opportunity for smaller companies. But eventually, it will lead only to a limited growth of the smaller ones compared with the incremental growth of the giants.
Going by the details of the draft we have accessed, the incentive under Global Sourcing is put in ascending order from 2% to 12%. The higher the incremental revenue, the better will be the percentage of cashback.
For the lowest 2% cashback a company must have a minimum incremental domestic sales revenue of INR 75 crore. The maximum of 12% will be given to the companies which have more than INR 1,000 crore of incremental sales revenue.
It is obvious who the gainers from the scheme are. It creates a situation where the big ones will become bigger, and the smaller ones will become largely dependent on them.
The smaller ones have been on the edge for the last three-four years. According to a report by ACMA, in FY2018 the average PAT for foreign, JV, and domestic companies were at 6.8 %, 5.6% and 4.8% of the total revenue, respectively. This shows the dwindling profitability of smaller firms.
In the scheme to encourage exports, component makers can claim cashback of 4%-7% on the incremental exports. The eligibility criteria, including turnover and fixed asset etc., to avail the scheme are the same as mentioned above. The minimum cut-off is 125% of the incremental export turnover or incremental turnover, whichever is lower.
The PLI scheme also put the 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%.
This also completely excludes the small players from any direct benefit. It is also to be noted that a fair share of revenue of most of the small companies is from exports. Currently, the Indian component makers’ revenue distribution is broken into the supply to vehicle makers (OES), exports, and aftermarket contributing 60%, 25%, and 15%, respectively to the entire auto component industry’s annual turnover.
It does make not only the small players vulnerable, but in some cases, the big ones also will feel the heat as most of them are operating in a JV model. Under the JV agreement, most of their foreign partners block them from exporting or operating independently in many international markets.
The argument for the criteria is that with a limited fund, only the big ones could be accommodated for rapid growth to the make-in-India plan. However, this is completely contrary to the telecom sector, which gave a clear advantage to the local manufacturers. For mobile manufacturing, the foreign players’ eligibility criteria was INR 10,000 crore of turnover and minimum new investment of INR 1,000 crore. For the local manufacturers, they were an investment of INR 200 crore and a turnover of INR 100 crore.
EV and battery makers
The new scheme has marked out an outlay of INR 18,100 crore for advanced chemistry cell batteries. This will boost the battery manufacturing ecosystem in the country and give an impetus to cell manufacturing, along with the domestic manufacturing of cathodes, anodes and separators.
Now, the first thing first. Cell manufacturing requires massive investment which the small players will not be able to make. The small players and startups are primarily involved in BMS systems, charging infrastructure, or vehicle manufacturing. Going by the criteria, many of them will not be able to get any advantage.
India’s automotive industry, ranks fourth in the world in terms of volume, having the largest two-wheeler market and being the second-largest exporter of tractors. The sector’s exports in the last five years have grown by a CAGR of about 12% for components and 8% for vehicles.
Another pivotal aspect that remains uncovered in the scheme is encouragement for research and development. As the industry is seeing a massive technology transition, research becomes imperative. Historically the Indian component sector has largely been dependent on foreign partners for technology shelling out as much as (up to) 5% of revenue as royalty.
In the past five years, the government has withdrawn the 200% weighted deduction offered on R&D expenditure, and it remains ignored. It’s essential to have local R&D or design in India to have a lucrative make-in-India.
