Last year the government introduced a Production Linked Incentive or PLI scheme that aims to give companies incentives on incremental sales from products manufactured in domestic units. The scheme invited foreign companies to set up units in India and also aimed to encourage local companies to set up or expand existing manufacturing units and also to generate more employment and cut down the country’s reliance on imports from other countries. As part of Prime Minister’s ‘Aatm Nirbhar Bharat Yojana’ the scheme aims to attract more investments in some sectors of the economy which in turn will create more jobs while reducing India’s dependence on imported goods.
ACs & LED lights covered under the scheme
The PLI scheme also covers some white goods, viz., air conditioners and LED bulbs for which the scheme was announced recently with a budgetary outlay of Rs. 6,238 crore which will be implemented over FY22 to FY29. Companies meeting the pre-qualification criteria for different target segments will be eligible to participate in the Scheme. Incentives shall be open to companies making brown field or green field Investments. Thresholds of cumulative incremental investment and incremental sales of manufactured goods over the base year would have to be met for claiming incentives.
As per the scheme 3 categories in ACs are eligible for incentives, viz., –
- Components (which include high value, low value or a combination),
- High Value Intermediates (copper tubes, aluminum foil, compressors)
- Low value intermediates (printed circuit board [PCB] assembly for controllers, BLDC motors, service valves, cross flow fan for ACs and other components)
In case of LED lights, core components like LED chip packaging, resisters, ICs, fuses and large-scale investments in other components. Also, incentives are available for LED chips, LED drivers, LED engines, mechanicals, packaging, modules, wire-wound inductors and other components. Investments in components are categorized as “large” and “small,” with priority of incentive given to large units.
The first year of investment will be FY22 and first year of incremental sales will be FY23. The incentive will be paid after a year; for instance, for FY23 it will be paid in FY24. FY20 will be the base year for calculating incremental investment and incremental sales.
AC is a growing market
The overall market size for air conditioning products in India is estimated at around Rs17500-18500 crore. Of these, Room air conditioning (RAC) accounts for major portion, nearly 2/3rd of the market. Rest of the market include market for central air conditioning, including central plants, packaged and ducted systems, and VRF systems and other ancillary equipment. In terms of volume the industry size is estimated between 6.5mn and 7.5mn units.
ACs are import intensive
AC industry is import intensive with nearly 60% of the value of ACs is still imported, and the PLI incentive can push the manufacturers to gradually to invest in components. According to analysts, payback period of 60-80% on the investment made over a five-year period is attractive and may attract investments.
Compressor manufacturing is capital intensive
On the other hand, the high-value intermediates of ACs like compressors are capital intensive, needing a much higher scale of operation. Remember, a compressor plant breaks even at 2mn units and have low returns. Thus, return on investment may not encourage companies like Voltas to make investment in such intermediates while larger suppliers like Amber Enterprises and global manufacturers like Hitachi and Daikin who can push exports for scale advantage may find it worthwhile to take advantage of the scheme.
Meanwhile, for low-value intermediates like PCB and motors with low threshold of investment, there may be many companies, including larger AC companies, looking to invest. In the near term, this will drive import substitution and help benefit the component ecosystem in India. Over a period of time, this may also make costs competitive and improve local players’ ability to compete in export markets as well.
In case of LED lights, some core components like Integrated circuits, chips are very capital intensive and benefits might not be meaningful enough to attract investments.
Further, there are no incentive for finished products which restricts the financial benefit for players and thus makes the scheme less attractive. On the whole, the scheme is attractive for some international brands who can make India a manufacturing hub for their export business. Also, development of local supply chain will be a medium-term positive for the industry.