Daybreak - Govt's $3 billion boost for India's EV makers is trapped in ambiguity

Episode Date: May 31, 2023

The government of India launched a $3 billion dollar production-linked incentive (PLI) scheme for automobiles to boost manufacturing, especially EV manufacturing, within India in 2022.It was a win-win for both—EV makers had been eagerly waiting for beneficial subsidies and the government could use it to push domestic private investments and create jobs in the sector. But more than a year has passed and the funds remain untouched. Not a single company selected under the scheme has qualified for the incentives, let alone received them. Tune in to find out what's going on.Recommended reading: Rajiv Bajaj has the last sigh on EV subsidiesDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform.Subscribe for more exclusive, deeply-reported, analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcast, you've probably heard me. My interruptions, my analogies and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. A little more than a year ago, the government of India launched a $3 billion production linked incentive or PLI scheme for the domestic automobile industry. It was a win-win for both parties.

EV makers had been eagerly waiting for beneficial subsidies and the government could use it to push domestic private investments to create jobs in the sector. $3 billion. That is a whopping 26,000 crore rupees. But guess what? Forget about getting the incentives from this amazing scheme. Not a single company that was selected for this scheme managed to qualify for it. So the immediate question that arises,

is what does it take then to qualify for it? Let me break it down for you. First, there is a selection process where the companies basically apply for the scheme. Applicants are chosen if they meet the scheme's criteria, which could be revenue or net worth, their ability to do investments, and if it is a company that has never been involved

in manufacturing automobiles or auto components, then they can even show the government their proposed business plans. The government cleared 95 applicants on this basis. They include companies like Hyundai Motor India, PCA automobiles and component makers such as Bosch, Minda Corporation, among others. But this alone does not make them qualify to get the incentives. The next step is something called DVA certification or domestic value addition certification. The chosen applicants can claim incentives on products where at least 50%

50% of the product by value was not imported. And how does this happen? This is where things get a little tricky. There are government testing agencies in charge of certifying the extent of domestic value addition or DVA, whether it is 50% or not. Over 10 original equipment manufacturers or OEMs applied for DVA certification. Every single one of their applications were rejected, due to a lack of the required documents.

So what then were the required documents? Turns out until a month ago, we did not know. In fact, nobody knew, not even the government. The testing agencies had no idea about the fixed method for finding a company's DVA or domestic value addition. The ministry had not set a standard operating procedure for this. This was more than a year after the scheme was launched. It was only last month that the government finally released an SOP. Still, there are many

questions that remain unanswered. For starters, there is a clause that basically says that an OEM or an original equipment manufacturer may be given an exemption if they tell the government that they cannot comply with these SOPs. Then there is a question of retrospective applications. But let's forget about all that now. What was interesting was how this tug-of-war played between the government and some of India's most powerful corporations. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nickda Sharma, and I Don't Chase the News Cycle. Instead, thrice the week on Mondays, Wednesdays and Fridays,

I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 31st of May. Most of this year so far, the Ministry of Heavy Industries or MHAI has been busy with back-to-back meetings. These have been with automakers, automobile testing agencies, officials from the government-owned industrial finance corporation of India or IFCI, and representatives from the professional services firm Ernst and Young. The main issue being discussed in these meetings is, you guessed it,

the dispersal of funds for the $3 billion PLI scheme that we've been talking about. The biggest roadblock, like I told you earlier, is DBA. And this is what makes the automobile PLI unique, because it ensures DVA extensively, unlike a lot of other schemes. But don't get me wrong, these conditions are well-intentioned. And also, I'd say it is kind of fair after what happened to the fame subsidy. Let me help you jog your memory. The fame subsidy was introduced for a period of three years in April,

2019 by the government of India. Fame stands for the faster adoption and manufacturing of hybrid and electric vehicles in India. The scheme was extended again for a period of two years, which is going to end in March next year. The total outlay for the fame scheme phase two is 10,000 crore rupees. The idea behind it was to incentivize EVs for buyers and consumers to enable wider adoption. The second phase of fame subsidized up to 40% of the cost of locally manufactured electric two-wheelers or buses. But the program ran into trouble after allegations that certain beneficiaries were wrongfully claiming these incentives. In April last year, emails from a whistleblower alleged that leading electric two-wheeler companies like Hero Electric and Okinawa were allegedly importing components

and passing them off as local. The scheme is now under the government scanner and subsidies to players like Hero Electric and Okinawa, as expected, were suspended. So is this then a case of the government being extra cautious? A once-bitten twice shy kind of a thing? Not really. Stay tuned to find out. You see, the government wants to make companies in this PLI scheme to make a bunch of additional disclosures. The idea of course was to make it harder for them to declares. clear imported components as locally procured. Now, over the many consultation meetings to draft the SOP for the DVA certification,

the ministry proposed mandates that would require participants to give the government information about their Tier 2 and Tier 3 suppliers, entire supply chain details, margin structure, and change invoicing patterns. Many of these demands, of course, did not sit well with these companies. And until last month, they had a strong defense against the government for this, which was the absence of SOPs for an entire year after the scheme's launch. An executive at a major Indian automaker told Anushka Jain, a reporter with a kin, and I'm quoting, we would apply for product approval under DVA and the testing agencies would say,

how do I give you this certification? There is no instruction on which documents are needed for it. Now this SOP is out and like I told you there are still many questions that remain unanswered so let us stick to what we know for sure and that dear listener is that these auto companies already have a lot riding on the rollout

of these very SOPs because they have already made big business decisions that are dependent on receiving the incentives under the scheme for example during an analyst call in January this year, Shehleish Chandra, the managing director of Tata Motors, said that the company was reducing prices for its best-selling EVE Nekshin. This was considering a bunch of factors, including the PLI benefits. Bajaj Auto, another approved applicant, has committed 1,000 crore rupees in investments to expand its Akurdi plant in Pune in Maharashtra to manufacture 30,000 EVs a year.

It is the conglomerates like Tata Group and M&M that have the most to lose. And that is because they have the highest market share among EVs. Tata Motors has over 80% share in India's four-wheeler EV market. And M&M has a 63% share in the electric three-wheeler market. And the greater the sales, the more the incentive. And it is not just the auto majors who have been concerned about not getting these incentives. Component makers who were approved under the scheme were also worried because certain products were not covered in the scheme even a year after the ministry had said that it would update the list. So with the first year of incentives likely lost, companies are now questioning the very merit of these incentives.

Also, an executive at a two-wheeler OEM pointed to us the larger question, how much incentive would be available for the update? And will all the companies even be incentivized? And that is because this is a fund limited scheme. So we took this question to Hanif Kureshi, the MHI's joint secretary. He acknowledged that this has been a concern, but he said that due to the limited funding available under the scheme, the OEMs that qualify first will get the incentives.

For now, at least the SOP is out. But that is not the end of it. Stay tuned to find out more. After all the back and forth between the government and various stakeholders, the government did realize how much was at stake here, especially for automakers, because they had made decisions counting on the incentives that they would be getting from the scheme.

So the government rushed to release the SOPs about which, many things still remain unclear. For example, what about retrospective applications? And also, what was the point of all these stringent rules if in the end they have added a clause that, to put it simply, says that if companies go to tell the government that they cannot comply with certain rules, the government may or may not exempt them. An executive at a major Indian automobile manufacturer told the Ken

that right now, the regulatory costs of complying with the SOP does not. not seem worth it just for a few possible crores in incentives. He told us that the entire scheme to him seems a little doubtful right now. But you know what? There is a lot riding on the success of the scheme, an entire ecosystem to be really honest. The PLI is important for India to achieve its goal of 30% electrification of the country's vehicle fleet by 2030. And let us not forget that the Fame 2 scheme is going to expire next. Plus, another PLI scheme worth over $2 billion also depends on this scheme. That scheme is for advanced chemistry cell or ACC battery storage where companies like Reliance

New Energy Limited and OLA Electric are involved. The idea of this scheme is to boost EV adoption since these ACC batteries are used in EVs. So now I hope you understand why in this case the stakes are very high. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website.

I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv C. end.