Understanding the Production Linked Incentive Scheme for ACC manufacturing and Recent Updates

In the Union Budget 2021-22, presented in February 2021, the Finance Minister of India announced an outlay of INR 1.97 Lakh Crores for the Production-Linked Incentive (PLI) Schemes for 13 key sectors, aiming to boost local manufacturing and generate employment opportunities for the country’s youth. The current plan as a result of PLI schemes would lead to a minimum production of over INR 36 Lakh Crore in 5 years.

Overview and Technicalities of the PLI scheme – Watch video

In May 2021, Cabinet approved the DHI proposal for the implementation of the PLI Scheme for ‘National Programme on Advanced Chemistry Cell (ACC) Battery Storage’. A further notification was released by DHI on June 9, 2021 with more information on different scheme parameters such as salient features of the scheme, allocation of incentives and monitoring mechanism. The selection of beneficiary firms will be made by an RFP process that is yet to be started.

PLI Scheme for ACC Manufacturing

FAME focus has always been on demand generation and charging infrastructure creation. It does not ensure real localization and buying from Indian companies. It ensures some level of assembly-level capability development, which has already started for several components listed in FAME-II. Batteries being the highest cost contributor of around 45-50% if localized will be instrumental in lowering overall vehicle cost and reducing import dependency. It will help in EV penetration and develop the component industry for EV-specific components. 

The Government has taken the approach of PLI scheme to achieve the objective of localization. Through this Scheme, the Government of India intends to optimally incentivize potential investors, both domestic and overseas, to set-up Giga-scale ACC manufacturing facilities. The focus of the scheme has been on ensuring 60% localization. The scheme envisages setting up of a cumulative ACC manufacturing capacity of fifty (50) GWh for ACCs and an additional cumulative capacity of (5) GWh for Niche ACC Technologies.

Fund allocation

Total incentives planed for ACCs will be INR 18,100 Cr in the period of 5 years. Following is the breakup of incentives.

Value addition shall be construed as the percentage of manufacturing activity (manufacture ACC) being undertaken in India, by the beneficiary firm either on its own or through ancillary units or via domestic manufacturers.

Following parameters have been proposed to ensure real value addition of 60% in India

1. Minimum value addition by the beneficiary firm – beneficiary firm must ensure minimum 60% value addition within 5 years. The disbursement of incentives to begin once local value addition of 25% is achieved at Mother unit level.

2. Change in HSN at 6-digit level: There should be change in HSN code at 6 digit level on account of manufacturing activity taken by manufacturers and its suppliers

3. The final process of manufacture must be performed in India. The term “manufacturer” means “processing of raw-material or inputs in any manner that result in emergence of new product having a distinct name, character and use”

In other words, the battery should be manufactured in India by achieving prescribed localization along with the change in HSN code at mother unit level, ancillary unit level or at domestic supplier level to be eligible for the incentives

4. Value addition = Actual value added / Sale value (net of price adjustments, indirect taxes, etc). This may be expressed as percentage of manufacturing activity done in India.

5. The ‘actual value added’ may be calculated on the basis of financial records (including turnover reported in GST returns) as per the following formulae: 

Sale value (net of returns, price adjustments, discounts, etc.) of the said goods, excluding indirect taxes, if any, paid on the goods 

  • Less: Cost of raw materials and/or packing materials consumed in the said goods (i.e in the final sale price of the goods sold) to be calculated in terms of generally accepted costing principles 
  • Less: Cost of Material whose source of origin cannot be ascertained (beyond the prescribed threshold) 
  • Less: Cost of fuel consumed, if eligible for GST input credit 
  • Less: Expenses incurred in foreign currency for royalty or technical know-how as debited in the Income statement 

Add: “Actual value added by the ancillary units or domestic manufacturers” attributable to sale value (net of returns, price adjustments, discounts, etc.) of said goods

6. Actual value added by the ancillary units or domestic manufacturers’ is ‘actual value added’ by such units in relation to sale (net of returns, price adjustments, discounts, etc.) considered by the mother unit. The value of ‘Actual value’ added by the ancillary units or domestic manufacturers’ is to be validated basis the statutory auditor’s certificate 

7. However, the certificate for ancillary unit or domestic manufacturer is not required if value addition of that manufacturer is less than 2% of ACC manufactured by mother unit or INR 200,000 whichever is lower

8. The ultimate onus to validate the value addition of such ancillary & domestic manufacturers would remain on the beneficiary firm

9. Additionally, if the eligible unit is also engaged in manufacture of battery packs and a value addition till the cell stage could not be determined with the abovementioned approach, the percentage of value added calculated as above should be reduced as would be enumerated in the RFP/bid documents. The beneficiary firms shall submit the information pertaining to the fraction of battery pack in the total battery value produced in India

The incentive for the beneficiary firms in the form of subsidy to be disbursed would be calculated as following: Applicable subsidy amount per kWh X Percentage of value addition achieved during the period X Actual sale of Advanced Chemistry Cells (in KWh), as shall be specified in the RFP.

Further, the selected beneficiary firm will be required to provide documents or certificates issued by statutory auditors, director of concerned industries regarding commencement of commercial production & certifications on breakup of major components in the final value of finished goods sold.

The criteria to receive the subsidy will eventually increase domestic production, which in turn can help reduce the cost of electric vehicles, giving a boost to the EV industry. This scheme from the government can attract large-scale investments over the next few years as the potential of EV market in India expands.

Some Observations

– The scheme is end-use agnostic as the manufacturing can be done both for domestic use and export purposes. It helps foreign manufacturers to consider India as an alternative and a cost-competitive exporter over China, which is currently the focal point for battery manufacturing.

– Global firms such as Panasonic Corp, LG Chem Ltd and CATL Ltd are still to make any announcements about setting up lithium-ion cell manufacturing in India, whereas Indian firms such as Tata Chemicals, Amara Raja Batteries and Exide Ltd have announced plans to make lithium-ion cells and batteries in the coming years.

– Though the Government’s intention is to push the manufacturers through the eligibility criteria of scale and local value addition, the eligibility criteria would create challenges for manufacturers without an existing manufacturing and export base in India. These concerns have been raised by some top players.

– Manufacturers might also raise concerns about whether technology adoption and testing standards are in line with Indian conditions.

– The battery manufacturers are also pushed towards localisation by the phased manufacturing programme (PMP) where the manufacturers get duty protection for a certain period of time. However, the timelines set under PMP need to be extended to provide equal opportunities to new entrants.

– There is also a need to incentivize the downstream players to promote developing an ecosystem for battery manufacturing. The Production Linked Incentive scheme for the battery manufacturers needs to be coupled with other financial schemes for the peripheral manufacturing companies to overcome steep interest rates, higher logistics costs and poor infrastructure. A collective approach would develop the competency for providing value-added materials for local manufacturing in India.

About the author

Preetesh Singh, Manager at Nomura Research Institute Consulting and Solutions India. He can be reached at preetesh.singh@nri.com

Extensive contribution by Shravan Banot, Deputy Senior Consultant at NRI

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