Can PLI give new wings to crisis hit auto industry?

The new PLI scheme which will provide incentives of Rs 26058 crore over a five year period is likely to provide support for the industry to move towards these advanced technologies as well as clean energy. The expectations of higher investments being attracted to the sector are ambitious, pegged at over Rs42,500 crore, along with a projected employment for 7.6 lakh people

The launch of the production-linked incentive (PLI) scheme for the automotive sector comes as welcome relief to an industry that has been struggling to meet the challenges of the pandemic. These were highlighted by the recent exit of Ford Motors from the Indian market. Auto sales had fallen steeply in the last fiscal and demand revival this year has been hit by a spate of hurdles including semi-conductor shortages. The departure of the iconic American brand, however, cannot be blamed solely on the impact of Covid and the subsequent economic downturn. There were other long-term problems for its growing losses and these were accentuated by the depressed demand over the past year.

Ford is not the only auto company to pack its bags and leave in recent times. General Motors failed to make its investments here profitable and bowed out in 2017. Similarly Harley Davidson wound up in 2020. Even one of India's best known passenger car companies which reigned during the license raj era, Fiat, had to bow out in 2019.

The field is now largely dominated by Japanese and Korean companies, which are reaping the benefits of early investments in this country. Suzuki which currently commands a 48 per cent share of the passenger car market reached this commanding position by taking a gamble on setting up a factory here in the 1980s. At the time, other larger Japanese firms like Honda, Toyota or Nissan were not prepared to enter India with its labyrinthine maze of regulations. But the then chairman of the newly formed Maruti company, V Krishnamurthy was able to convince Suzuki to enter into a collaboration to manufacture low cost modern cars in India. As a result, by the time other foreign automobile companies decided to venture into the country, the Maruti-Suzuki brand was well entrenched with numerous indigenous component suppliers along with a country wide network of dealers. The early mover advantage gave Suzuki an edge that it has not lost till the present day.

The immediate crisis in the automobile industry is linked to the shut down of manufacturing operations in the first nationwide lockdown imposed in March last year. The opening up of the economy subsequently was gradual but seasonal festival demand buoyed sales from October last year onwards. Even so, the sector registered negative growth in sales of all vehicle categories in 2020-21. The biggest dip was in the case of commercial vehicles which fell by nearly 21 per cent, while two wheelers dropped by 13.19 per cent and passenger cars by 2.2 per cent.

The pick up in demand was again hurt by the second Covid wave in April this year. Despite the constraints of regional lockdowns, automobile production in the first quarter of 2021-22 was over double the output recorded in the same period last year. This increase is, however, on an extremely low base. A more viable comparison is with the first quarter of fiscal 2019-20, and this shows a decline of 48 per cent. As against 6.08 million vehicles produced in April- June 2019, only 3.1 million vehicles were manufactured in the same period this year. What is interesting is that two wheelers and commercial vehicles production fell by 50 per cent over fiscal 2020, but passenger cars output was only about 9 per cent lower.

In fact, demand for cars has rebounded strongly partly because of consumers preference for personal vehicles to avoid infections. Unfortunately, the industry may soon be unable to meet the full demand. A big reason is the global shortage of semiconductors that has already impacted production. Another constraint affecting both import of components and export of vehicles is the worldwide shortage of containers. These factors are likely to hobble automobile production for some time to come.

The PLI scheme for the automotive sector, however, puts the spotlight on future growth and development as it is meant for advanced technologies. In the long run, the industry will have to tackle the issue of shifting to production of hydrogen cell and electric vehicles, as is being done globally over the past few years. The issue of climate change is becoming increasingly important and a spate of natural disasters are being attributed to the warming of the planet. The need to reduce emissions from automobiles is becoming a priority and most international automobile companies have seen the writing on the wall. Nearly every company is churning out futuristic models of clean energy vehicles to meet the potential demand in coming years. The domestic automobile industry will now also have to look ahead in the same way and slowly shift away from the traditional petrol and diesel engines.

The new PLI scheme which will provide incentives of Rs 26058 crore over a five year period is likely to provide support for the industry to move towards these advanced technologies as well as clean energy. The expectations of higher investments being attracted to the sector are ambitious, pegged at over Rs 42, 500 crore, along with a projected employment for 7.6 lakh people. What is equally relevant is that it will enable the automobile industry to change its outlook in tandem with the rest of the world. It will also help manufacturers to ensure that vehicles can be made within the parameters needed by the extremely cost-conscious Indian consumers. The only criticism is that this package of measures needed to have come earlier rather than waiting for a crisis to engulf the industry.