Capital investment by private companies, which is projected to slide this fiscal due to Covid related lockdowns, may get a boost from the production-linked incentive scheme announced by the government for various key sectors.
The production linked incentive scheme (PLI) is set to be a catalyst for reviving the private sector investment in India, which has been languishing for some years, apart from aiming to place India as a global manufacturing leader.
In the Union Budget 2021-22, an outlay of Rs 1.97 lakh crore for the PLI schemes for 13 key sectors was announced, to create national manufacturing champions and generate employment opportunities for the country’s youth. Minimum production in India as a result of these schemes is expected to be over $500 billion in five years.
The 13 sectors include mobile phone and electronic manufacturing, drug intermediaries and active pharmaceutical ingredients (APIs), medical devices electronic and tech products, pharmaceuticals drugs, telecom and networking products, food products, white goods, automobiles and auto components, advanced batteries and speciality steel sectors.
Capex below pre-Covid levels
According to an analysis of the capex pipeline by Nirmal Bang Institutional Securities Ltd capex announcements by the private sector, central and state governments during April 2020-July 2021 have been below the levels seen in FY19 and FY20.
Private sector capex declined from Rs 12.2 lakh crore in FY19 to Rs 8.4 lakh crore in FY20 and further to Rs 6.6 lakh crore post-pandemic in April 2020-July 2021 period.
According to the analysis, private sector capex is largely concentrated in select areas such as metals (35%), electronics (14%) and data centres (9%). The share of metals in the private sector capex has increased from around 10% in FY19 to nearly 35% currently. The share of electronics has increased from 4% in FY19 to 14% currently, supported by the turn in the global metals cycle.
Capital investment shrinking
Capital investment by private companies could slide this fiscal as well after shrinking in the previous year due to Covid related lockdowns, according to a Reserve Bank of India forecast.
A study of the phasing profile, i.e., stage-wise implementation over three or four years, of planned capex of pipeline projects could shrink 27% on year to Rs 68,469 crore. The phasing profile of the capex based on the pipeline of sanctioned projects in the previous years indicates a decline from Rs 94,227 crore in 2020-21 to Rs 68,469 crore.
The pandemic impacted adversely appetite for new projects during 2020-21 and also posed impediments to timely completion of projects in the pipeline,” the RBI said.
The regulator assessed that a total capex of Rs 1.60 lakh crore would be incurred by the private corporate sector in FY21, translating into a sharp dip of 30% from the previous year.
Auto sector PLI
The PLI scheme for the auto and auto component industry is set to disrupt the industry in a big way pushing existing large players to open their game plan on electric vehicles (EV) and vehicles made using newer technologies while also bringing in several newer players into the fray competing for a share of the expanded market.
Large auto players such as Hyundai, Tata Motors, Maruti Suzuki have already started studying their production plan keeping in mind the PLI scheme. Several smaller players and the startups, who have just recently begun their journey in the EV space, have also begun discussions to push up production in line with the PLI scheme.
“Government support for newer technologies and EVs will continue. Post FAME II and PMP, PLI will further unleash the potential for EVs in 2 and 3 wheelers. PVs and CVs will have to wait till they attain viability from a Total Cost of Ownership (TCO) perspective. Automotive component companies to see further improvement in cost competitiveness and will help position India as an export hub,” according to Crisil.
Another analysis done by Kotak Institutional Equities that the PLI scheme would see rapid adoption by the EV segment, especially two-wheelers and incumbents will have to step up. For auto component manufacturers, the government will provide incentives in the range of 8-13 per cent with an additional 5 per cent incentive for manufacturers of battery cell and hydrogen fuel cell components.
Textiles
The over Rs 10,000 crore PLI scheme for textiles focuses on investment i40 MMF apparel product lines, 14 MMF fabric lines and 10 segments or products of technical textiles. These 64 items have been chosen on account of being among the top-traded lines in the global market with India having less than a 5% share in each of them. The inclusion of intermediate products reflects the government’s keenness to ensure the scheme ultimately delivers on the broader policy objectives.
Specialty steel
The scheme with a budget outlay of Rs 6,322 crore has been introduced with a multi-fold objective of encouraging domestic manufacturing, reducing India’s dependency on imports, and of promoting exports from India for speciality steel. It is expected that due to the implementation of the PLI scheme along with other measures taken by the government, production of speciality steel will increase by 140 per cent by FY27, over the baseline period of FY20, along with reduced import dependence to the tune of 76 per cent and increase in exports by 244 per cent.
White goods
Around 52 companies have applied for availing production-linked incentives (PLIs) for white goods makers, proposing an investment of around Rs 6,000 crore in the manufacturing of components for air conditioners and LED lights.
Most of the investments are expected to happen in the next two to three years; and after that, local production for components for AC and LED light is expected to start.
This will not only help in saving the foreign currency, as the majority of the components in AC and LED lights are imported from countries as China and Taiwan, but also create job opportunities in the country. Wednesday was the deadline for the industry to submit applications for the PLI scheme for white goods (air conditioners and LED lights).
The success
In its effort to make India a manufacturing hub, the government is developing industrial corridors and smart cities to provide infrastructure based on state-of-the-art technology with modern high-speed communication and integrated logistic arrangements. Innovation and research activities are being supported while the property rights registration set-up has been upgraded. A number of new initiatives have been launched in order to streamline and rationalise licensing rules at the state government level, aligning them with global best practices.
While the scheme appears designed meticulously, its operational success is likely to hinge on how new entrepreneurs and existing companies weigh the risk-reward equation, especially at a time when the pandemic has spurred uncertainty.
https://cfo.economictimes.indiatimes.com/news/can-pli-schemes-boost-india-incs-capex-cycle-amid-pandemic/86358738
