The Union Cabinet today approved the production-linked incentive (PLI) scheme for air conditioners (ACs) and light-emitting diode (LED) lights with an aim to boost the local component supply ecosystem for these items. Under the new PLI, a sum of Rs 6,238 crore has been approved as incentives to selected manufacturers over a five-year period starting 2021-22.
As per the government’s initial estimates, the scheme has the potential to attract Rs 7,920 crore of additional investment into the two sectors, creating 400,000 jobs, directly and indirectly. These are expected to translate into Rs 168,000 crore of incremental production of goods, including Rs 64,000 crore worth of exports with 2019-20 as the base year.
Since last April, the cabinet, headed by Prime Minister Narendra Modi, has approved PLI for five sectors. But unlike the previous ones the latest scheme solely focuses on component manufacturing. The manufacturers will receive a four to six per cent incentive on incremental production only if they add value by growing component production.
“Selection of companies for the scheme shall be done so as to incentivize manufacturing of components or sub-assemblies which are not manufactured in India presently with sufficient capacity. Mere assembly of finished goods shall not be incentivised”, the government said in a statement.
Leading consumer durable manufacturers said it will help in growing the local AC manufacturing base and make India more competitive in the global market. However, no incentives for incremental assembly will lead to the postponement of investments by local players in building capacity for finished ACs.
According to Krishan Sachdeva, chairman, Carrier Midea India, through the scheme the government has taken two steps forward. “Instead of focusing on growing the base for the final product, this time the entire focus is on developing the component ecosystem. This is a truly forward-looking move”, he said.
As per Vijay Babu, vice-president, home appliances at LG Electronics India, it will certainly benefit Indian AC manufacturing & will encourage industry to boost local production.
The importance of the step can be judged from the fact that currently 65-70 per cent of the cost materials used in local assembly are imported. Key parts like compressors, variable speed motors in indoor units and high-quality copper pipes, among others, are being heavily imported.
“We expect multinational companies to bring in meaningful investments through the FDI route for component manufacturing which will help increase the local value addition in AC manufacturing from current 25 per cent to 75 per cent level”, said Kawaljeet Jawa, MD & CEO, Daikin India.
Manish Sharma, President & CEO, Panasonic India & SA said, “We have always maintained that one of the key pillars to drive up manufacturing and exports is backward integration. As component manufacturing is a key beneficiary of the new policy, indigenous AC manufacturing will get a fillip. This will also enable design-led manufacturing, fuel innovation and drive component exports along with finished ACs from India”.
Manufacturers, however, are now expecting large global component makers to set up shop here. Since key components that are being imported require huge investments to manufacture locally, setting up such facilities will not be a viable business proposition for entities in India, companies said.
Further, to turn such investments profitable the kind of scale that is required does not exist in the local market. At 6 million units a year, India’s AC market is much smaller compared to leading global markets like China (50 million units), the USA (17 million) and Japan (12 million).
According to Jawa from Japanese air conditioning giant Daikin, in the long run, the scheme will help India gain a competitive advantage. “Though few manufacturers willing to invest towards the production of the finished good may delay the planned investments”, he said