How India's mega plan to boost auto production sputtered

The production-linked incentive (PLI) scheme for automobiles and components (PLI-Auto) was announced in 2021, but the first payouts happened only in January this year. For FY26, the government expects incentives to make up only 12% of the overall ₹2,818.85 crore allotted to the scheme, showed data from the Centre's Outcome Budget, which sets targets for outcomes of various schemes. That would make it the second year the scheme's disbursals will be only a small share of the funds allocated.

The scheme, which runs till FY29, promises incentives for producing advanced automotive technology, including electric vehicles and fuel cell vehicles. However, stiff targets for revenue, investments and local value addition have made it hard for many companies to qualify for incentives. Policy changes and supply chain challenges have further contributed to the scheme's slow progress.

Challenges for EV makers

EV makers say they are facing challenges due to policy uncertainty on manufacturing and adoption of zero-emission vehicles. "The PLI-Auto scheme aims to boost incremental production and sales; however, most companies face challenges such as supply chain disruptions, regulatory delays, and cautious investment due to frequent changes in fiscal EV policies. Notably, three EV policies were introduced in calendar year 2024, adding to the uncertainty, complexity and inconsistency," said Alok Rai, director, public affairs, Society of Manufacturers of Electric Vehicles, an industry body.

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The policies mentioned are the Scheme to Promote the Manufacturing of Electric Passengers Cars in India to attract foreign automakers to manufacture in India; the PM E-drive scheme to subsidize EVs for consumers; and the Electric Mobility Promotion Scheme (EMPS) which ran from April to September 2024.

"These factors hinder companies' ability to meet PLI targets, as the basis here is incremental sales," said Rai. "A key flaw in the scheme is its restrictive qualification norms, limiting participation to certain companies. This exclusion, combined with policy uncertainties, slows sales growth and delays PLI compliance," he said.

As per the government's Outcome Budget, the target for disbursals in FY26 is ₹336.77 crore. In FY25, the Centre had allocated ₹3,500 crore for the scheme, out of which it aimed to disburse ₹3,150 crore as incentives. Revised estimates showed that the government only spent ₹346 crore on the scheme overall.

Tata Motors Ltd and Mahindra & Mahindra Ltd, the leaders in India's electric vehicles market, received ₹246 crore in incentives this January, becoming the first automakers to do so. Ola Electric has received approximately ₹120 crore, the electric two-wheeler maker said on 7 February.

Tata Motors and Mahindra & Mahindra declined to comment.

Also read | Electric vehicle sales charged up this year, and not just because of subsidies

Experts expect larger amounts to be disbursed once production and sales pick up in later years, given that the scheme is linked to performance.

Under the scheme, manufacturers receive PLIs for incremental sales values after clearing the 50% localization hurdle. That means more than 50% of the components or raw material used to manufacture automobiles and auto components must be sourced locally.

Disbursals

As many as 82 companies have been approved for the scheme till date, of which 18 are vehicle makers, while the rest make components. Of these, 13 companies have received approval for incentives, including products from Tata Motors, Mahindra & Mahindra, Ola Electric, TVS Motor Co., Toyota Kirloskar Auto Parts and Bajaj Auto.

Under the scheme, aspirants request incentives for the sales made in the year after the end of the fiscal. For instance, companies may seek incentives for sales made in FY25 at the beginning of FY26.

Industry outlook

However, growth in automobile and auto component sectors moderated in FY25, according to analysts.

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"Icra expects the revenue growth of Indian auto component industry, represented by sample of 46 auto ancillaries with aggregate annual revenues of over ₹300,000 crore in FY24, accounting for close to 50% of the industry, to ease to 7-9% in FY25 and 8-10% in FY2026, from the highs of approximately 14% in FY24," said Srikumar K., senior vice president and co-group head, corporate ratings, Icra.

The growth of the auto sector is likely to be led by two-wheelers, which will grow at 6-9% in FY26, following an approximately 11-14% growth in volumes in FY25, according to Icra's Srikumar. At the same time, passenger vehicles and commercial vehicle industry growth will be marginal. Passenger vehicle industry's growth in FY25 is expected at 0-2%, and 4-7% in FY26, he said.

The PLI-Auto scheme is also a major investment for companies who seek benefits. As per the scheme, automakers with a revenue of over ₹1,000 crore can apply. Additionally, companies applying for PLIs for two- and three-wheelers have to make new investments worth at least ₹700 crore by the end of FY25, and at least ₹1000 crore by the end of FY27.

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For carmakers, the mandatory investment criteria is more stringent: They must invest ₹1,400 crore by the end of FY25, and at least ₹2,000 crore by the end of FY27.

PLIs have been instrumental in solidifying margins for automakers. Tata Motors, which received ₹142.13 crore in Q3, said the company's profit margins for specific categories would have been flat if not for the PLI accrual.

Ebitda margins for passenger vehicles and electric vehicles cumulatively were 7.8%, according to the company's earnings call in January this year. "This obviously reflects about 150 bps impact for the PLI approval that we took in Q3 FY 25. Without the PLI, Ebitda margins would have been flat," said Dhiman Gupta, vice president - finance, Tata Motors Passenger Vehicles Ltd and Tata Passenger Electric Mobility Ltd, during Tata Motors' earnings call in January this year.