Analyzing the PLI scheme for battery manufacturing

By Dipti Lavya Swain and Esha Nair, HSA Advocates
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In a bold move, the government approved the production-linked incentive (PLI) scheme in advance chemistry cell (ACC) battery manufacturing on 11 November 2020 in addition to 10 other sectors. The scheme’s battery policy aims to make manufacturers globally competitive, boost exports, achieve economies of scale and produce cutting edge products.

Dipti Lavya Swain, Partner, HSA Advocates
Dipti Lavya Swain
Partner
HSA Advocates

This is an effort to promote the use of electric vehicles (EV), which have faced headwinds in India given the high battery costs and lack of supporting infrastructure. Indian companies generally import batteries, which account for more than half the cost of an EV. The government has proposed the building of local manufacturing facilities, seeking to reduce the cost and encourage competition.

The government has demonstrated its desire to push India towards clean energy and transportation, exemplified by the ambitious target of 450 GW of renewable power generation by 2020. Apart from championing EVs, there has been a notable push for round the clock supply of power from renewable energy, which involves providing for energy storage, through ACC batteries.

Key aspects of the scheme are firstly that the proposed battery policy is output-based rather than input-based. The subsidy is linked to the output manufactured and the value addition achieved by private entities. Private entities will be eligible for a government subsidy only if they achieve a 60% value addition within five years of the date of commencement of the project, that is when they are expected to reach full-scale production. Any new technology that evolves over the next 10 years will also be eligible for a subsidy.

Next, the government has allocated `570 billion (US$7.7 billion) under the scheme to the automobile industry for the next five years. In fact, `180 billion (US$2.4 billion) has been allocated in advance to ACC manufacturing industries. The government will pay a set subsidy (as bid for by the private entity) to the manufacturer for a period of 10 years, subject to discounting over the years. Such discounting would take into account economies of scale and reduced manufacturing costs.

While the life cycle of the ACCs has been prescribed by the government, there is no specific technology to be adopted by the private sector. This allows room for varied and innovative technologies that can potentially help the private sector in meet- ing the quality specifications in an economically efficient manner.

Esha Nair, Associate, HSA Advocates
Esha Nair
Associate
HSA Advocates

The scheme proposes that the relevant state government, central government, and manufacturer enter into a tripartite agreement. The state government would extend its support to the private sector by providing land for setting up the facility, assisting in procuring permits and licences, providing trunk infrastructure and so on. This assurance from the state government will address some of the most common concerns of investors.

The scheme adopts a quality and cost based selection (QCBS) method to evaluate bids. Typically, the government follows the QCBS method for the procurement of goods and services; however, this is one of the first instances of the government adopting the QCBS method for such a programme. Both the subsidy quoted and the value addition offered by the bidder would be taken into account during the selection process.

The scheme is positioned as a critical component of the government’s flagship Atmanirbhar Bharat (self-sufficient India) programme that seeks to cre- ate a self-reliant Indian manufacturing ecosystem. The government plans to impose tariffs on imports of lithium-ion cells for the next 10 years. With the country only manufacturing battery storage packs and heavily relying on Chinese imports for the rest, the aim is to become self-sufficient across the EV value chain by 2025.

As a step in the right direction, ministries will be given the power to implement the scheme. Additionally, unused scheme funds can be utilized by the other sectors, thus ensuring the optimal utilization of those funds. This is a significant opportunity for the private sector to participate and accumulate benefits under the PLI scheme and at the same time, contribute to India’s large and unique battery manufacturing story. While efficient implementation will determine the overall success, the scheme is well positioned to provide a boost in production, competitiveness and exports of manufacturing companies.

Dipti Lavya Swain is a partner and Esha Nair is an associate at HSA Advocates

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