Has India clinched the manufacturing deal?

If there was an ease-of-manufacturing index, India would not score very high — for a host of well-known reasons ranging from process to costs. The scheme to offer cash incentives for local manufacturing of solar equipment as well as batteries may require a few iterations to really click, or it may fly in the first round of bidding itself. What is clearly visible is the intent of policy makers to get the maximum bang for each rupee spent.

Solar and FOMO

In the case of solar, the aim is to offer Rs 4,500 crore ($620 million) in subsidies to large local manufacturers with at least 1 gigawatt each of cells and modules capacity. If some develop even larger manufacturing capacity for more efficient cells, and there is further backward integration along the solar value chain, that would mean a bigger subsidy under the production-linked incentive (PLI) scheme.

The subsidy allocations will be on the basis of competitive bidding. The Indian Renewable Energy Development Agency, or Ireda, has already begun the process and hopes to announce the successful applicants by the end of July.

Will companies actually bid, given the onerous conditions that need to be met to secure the payout? Will there be enough demand for domestically made modules? Will these modules be price-competitive, even with the incentive? “Several firms will likely be interested in this scheme despite the concerns. Companies will consider the possibility of losing market share if they sit out and competitors receive the subsidy,” BloombergNEF said in an analysis of the programme. The fear of missing out, or FOMO, will likely boost participation. Indian module makers, government-owned companies and foreign module manufacturers are expected to be in the fray.

Battery manufacturing  

             

A much larger, Rs 18,100 crore ($2.5 billion) plan to promote local manufacturing of batteries was approved by the Cabinet last month. The PLI for “advanced chemistry cell (ACC) battery storage” aims for 50 gigawatt hours of ACC capacity and 5 gigawatt hours of niche ACC.

The focus is again on scale, with the minimum capacity of 5 gigawatt hours required to compete in the bidding for incentives. The bigger the local value addition, and the more advanced the battery, the more money would be paid out. The facility would have to be commissioned within two years and “the incentive would be disbursed thereafter over a period of five years.”

The government expects to attract direct investment of over $6 billion in this sector as a result of this scheme, and for this to feed into the growth of electric vehicles and other storage applications in the country. Many other things would need to fall into place, however, for the anticipated increase in electric mobility and the projected savings of up to Rs 2.5 trillion ($35 billion) in oil imports.

Large market

India is expected to add about 10 gigawatts of new solar in 2021 — the third-largest amount of capacity in the world, after China and the US — according to the latest projection from BNEF. The size of the annual market is expected to get larger as solarisation expands on rooftops, on water bodies and in farms, and as new more aggressive targets kick in. The demand is likely to be enough to support a larger local manufacturing base.

In the case of batteries, the market projections are not as compelling yet, and the risks are higher. However, so are the rewards, if the desired investment and scale comes through, and “global champions” become a reality, which is one of the stated aims of the scheme.

The bonus gain from these initiatives could be a further improvement in the World Bank’s ease-of-doing-business rankings, as investor pain points are addressed. India has managed to reach the 63rd rank now, though there are reasons to worry on some of the sub-ranks such as enforcing contracts (163), starting a business (136) and registering property (154). As reported in Business Standard last week, a high-level committee has recommended making the initiative more investor-friendly, with regular hand-holding and fast-track removal of hurdles.

The latest PLI scheme covers 10 sectors and offers incentives totalling Rs 1.46 trillion ($20 billion), with the largest chunks going to automobiles and auto components (40 per cent) and batteries (12 per cent). Also in the list are telecom and networking products, specialty steel and electronic products.

An earlier PLI scheme for mobile phones and electronics manufacturing garnered considerable global interest and worked fairly well, with 16 applications approved as of February 2021.

With 13 sectors now covered, the PLI scheme is part of the attempt to “make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology, ensure efficiencies, create economies of scale, enhance exports and make India an integral part of the global supply chain.” The objective is clear. The proof of the pudding will be in the eating.

The writer is the Editor – Global Policy for BloombergNEF | vgombar@bloomberg.net