PLI scheme: How auto component MSMEs stand to benefit from govt’s production incentives for auto sector

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September 15, 2021 8:12 PM

Ease of Doing Business for MSMEs: The government said it expects the PLI scheme, which focuses on electric and hydrogen fuel cell vehicles, to lead to fresh investments of over Rs 42,500 crore in the auto and auto component sector along with an incremental production of over Rs 2.3 lakh crore and over 7.5 lakh job creation in coming five years.

Despite Covid 2.0 setback, auto component industry is likely to see 20-23 per cent revenue growth in FY2022, according to ICRA. (Image: Reuters)

Ease of Doing Business for MSMEs: The production-linked incentive (PLI) scheme for auto and auto components businesses approved by the government on Wednesday to support the Covid-hit sector for enhanced production will also benefit micro, small, and medium enterprises (MSMEs), according to experts. The auto component segment majorly comprises Tier-II and Tier-III MSMEs supplying to top tier players and original equipment manufacturers (OEMs). The government said it expects the PLI scheme, which focuses on electric and hydrogen fuel cell vehicles, to lead to fresh investments of over Rs 42,500 crore in the auto and auto component sector along with an incremental production of over Rs 2.3 lakh crore and over 7.5 lakh job creation in coming five years. The auto component sector had witnessed a 3 per cent fall in cumulative revenue in FY21 to Rs 3.4 lakh crore due to Covid-led disruption in demand, according to Auto Component Manufacturers Association (ACMA).

“The new scheme aims at MSMEs, which are into manufacturing, to scale up their production to reduce excessive reliance on imports by achieving better economies of scale to become export competitive. It will enhance India’s manufacturing capabilities and bring in more investment as well as it will be home for more quality automotive products. Incentive for incremental sales will push more sales and increase in revenue. With fresh investment and growth, PLI scheme will help create thousands of new jobs in this sector,” Sandip Chhettri, CEO at B2B portal for small businesses TradeIndia with over 5.5 million users told Financial Express Online.

Ritika Ganju, Partner at Phoenix Legal said that one of the important and expected outcomes of the scheme is the major positive impact it will have on the MSME sector. “With MSMEs being crucial contributors of the supply chain of automotive parts and components that PLI scheme is targeted at, the expected capital push will mobilise the MSME ecosystem with the expansion of supplier base within the MSME sector. As a natural consequence, we are likely to see an increase in employment opportunities in the sector as well,” Ganju told Financial Express Online.

Existing automotive companies as well as new investors who are currently not in the automobile or auto component manufacturing business can also benefit from the scheme, the government added. The scheme has two components — Champion OEM Incentive Scheme and Component Champion Incentive Scheme. Both schemes are linked to the sales value generated by businesses. For OEMs, it is applicable on battery electric vehicles and hydrogen fuel cell vehicles of all segments, and for component manufacturers, it is applicable on advanced automotive technology components of vehicles, completely knocked down (CKD)/semi-knocked down (SKD) kits, vehicle aggregates of two and three-wheelers, passenger vehicles, commercial vehicles, tractors, etc.

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“The scheme will help MSMEs to hire more. They hire people and rightsize their capacity as per the orders they get. So, if OEMs have demand following the new scheme, the benefit would trickle down to MSMEs in different tiers. Most industries today are working on a just-in-time approach and if orders come, the capacity and workforce is strengthened,” Vinay Piparsania, Automotive Expert, and CEO, IIT Delhi Endowment Management Foundation told Financial Express Online.

According to an ICRA release published last month, despite Covid 2.0 setback, the auto component industry is likely to see 20-23 per cent revenue growth in FY2022 supported by a recovery in the domestic automobile industry and robust exports. The pass-through of inflationary trend in commodity prices will also aid revenue growth, it had noted. The new PLI scheme along with the previously launched PLI scheme for Advanced Chemistry Cell (ACC) worth Rs 18,100 crore and Faster Adaption of Manufacturing of Electric Vehicles (FAME) scheme of Rs 10,000 crore will enable India to leapfrog from traditional fossil fuel-based automobile transportation system to environmentally cleaner, sustainable, advanced and more efficient Electric Vehicles (EV) based system, the government noted.

“Indirectly that will definitely benefit MSMEs if the business of OEMs goes up. Once the ecosystem grows bigger, it means companies in auto parts are in focus. So some way or the other, it will benefit. For us, it depends on which manufacture goes for this scheme and what kind of parts they want,” Mayank Kejriwal, Director at automotive casting firm Kiswok Industries told Financial Express Online. Kejriwal is also the co-chairperson of the East region at ACMA.

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