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Wednesday was a truly landmark day for the Indian automotive industry as the government announced its much-awaited production-linked incentive (PLI) scheme for the auto sector. The PLI programme for India’s automotive industry is quite distinct from other sectoral schemes as it attempts to address the challenges of existing competitive gaps as well as those arising from rapid tectonic technological shifts that are taking place, while simultaneously seeking to leverage the potential opportunities presented by a realignment of global supply chains.

Over the years, India’s automotive industry has become fairly competitive and attained global scale. India is the world’s largest two-wheeler maker and fifth-largest car and commercial vehicle manufacturer. The sector contributes about 35% and 6.4% to our manufacturing and national gross domestic product, respectively, and provides direct and indirect jobs to around 37.5 million people. Moreover, goods and services tax collections from the automotive industry stand at about 1.5 trillion annually, which is roughly 15% of total collections.

However, things are not all bright, as there are several complex issues and challenges that need to be addressed immediately to ensure the continued health and growth of this industry. Like with other sectors, covid has caused immense damage to the automotive sector, with several factors like a cyclical downturn, Bharat Stage VI transition and supply-chain disruptions having made conditions even more severe. Recent domestic vehicle sales have been the lowest in several years and exports have also been impacted by lockdowns in major global markets. Although signs of recovery are now clearly visible, ongoing global supply disruptions, particularly of semiconductors, threaten to dampen the revival of this sector.

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, as India’s current auto-component exports comprise a mere 1% of their global trade and the value of motor vehicles exported from India in 2019 was about half and one-eighth of the exports from Thailand and Mexico, respectively. Further, India’s annual total automotive imports are currently pegged at around 1.83 trillion, which is 23% of overall industry sales turnover. A joint study by the Society of Indian Automobile Manufacturers and Automotive Components Manufacturers Association of India estimated that of our top 12 import categories, drive transmission and steering units, engines, electricals and electronics account for 62%, with most imports from China (at 32%). Clearly, while we are competitive in some areas, 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.

Fast-evolving automotive regulations on emissions, safety and energy efficiency, coupled with swift changes in consumer trends, are driving rapid technological shifts globally. This includes a shift towards electrification and rising levels of vehicle automation and connectivity. Hence, it is projected that in 10 years, advanced electronic systems will account for 45% of a car’s value, and the share of lightweight materials will also increase to 60%. We have low levels of localization in these technologies, and unless we act now, the Indian industry would be at threat of losing competitiveness and lagging rivals. Recent disruptions in global supply chains highlight our vulnerabilities and so it is important for us to ‘Make in India’ at global scale and quality. For this, we must address the current cost disadvantages in various automotive technologies.

The auto PLI scheme is among the largest government supply-side incentive schemes launched for the automotive sector. Given the role of startups and new technology players in the automotive space, this scheme logically covers not only existing auto original equipment and component makers, but also new non-auto investors. The PLI criteria for eligibility, determined by new domestic investments and yearly growth in sales value and localization, offers all companies an equal opportunity, irrespective of their size, area of operation or country of incorporation.

While advanced-technology vehicles include battery and fuel-cell electric vehicles (EVs), at the component level, the approach adopted is to target advanced-tech components that currently show high import intensity with usage across all vehicles. The government has taken into consideration the industry’s request of keeping 2019-20 as the base year for evaluating incentives and has also built in flexibility for the inclusion of more technologies.

It is commendable that the government, particularly the ministry of heavy industries, has ensured that the scheme addresses key critical challenges faced by the Indian automotive industry. This scheme will not only provide the desired impetus to enhance ‘Make in India’ and reduce imports, but will also facilitate the process of making the industry more competitive globally and help it overcome existing cost disabilities in high-end technologies.

Notably, the scheme is likely to go a long way in encouraging the Indian automotive industry to move up the value chain into higher-value-added technologies, thereby spurring sectoral growth.

The PLI announcement was well timed and should also help attract global investments, as many companies are looking to diversify their supply chains in the context of the pandemic and emerging geopolitical scenarios.

Now the automotive industry must step up and invest in future technologies, advanced manufacturing and improving their processes as well as skilling their workforce, so as to bolster India’s integration with global value chains. Given the capability of the auto industry and strong continued support of the government, I believe that we can make India a hub for the manufacturing of advanced, clean and efficient vehicles—not only for our domestic market but also for exports.

Vikram Kirloskar is chairman, SIAM Passenger Vehicle CEOs Council and vice chairman, Toyota Kirloskar Motor Pvt Ltd.

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