Train parts for Indian Railways and PLI scheme

This recent news article by Twesh Mishra in The Economic Times detailing the government's intent to introduce a Productivity Linked Incentive (PLI) scheme for the Indian Railways' (IR’s) rolling stocks has garnered significant attention, in which the key markers are:

The specifics of the PLI scheme will be developed in collaboration with a consultant to be appointed through a bidding process to be initiated this month

 

The consultant shall submit a report for attracting manufacturing firms, foreign and Indian, to help IR lessen import burden mainly for LHB and Vande Bharat trains by devising strategies for localizing and boosting domestic production of imported components, which should also drive down the manufacturing and maintenance cost.

 

The report shall also gauge the export potential of Vande Bharat trains.

 

(https://economictimes.indiatimes.com/industry/transportation/railways/railways-plans-pli-scheme-for-train-parts/articleshow/102752283.cms?from=mdr)

 

What is the PLI scheme? It is a GoI initiative that seeks to incentivize companies for boosting local production by setting up or expanding manufacturing units to augment their output with incentives on incremental sales over a specified base year. The scheme typically extends an incentive of 3% to 6% for a period of five years. It broadly stipulates a sum, usually a fraction of sale price for every unit produced. Furthermore, the scheme can be complemented with state-level incentives, like GST waivers, land and power subsidies, and partial loan repayments.

 

This output-driven incentives of the scheme has covered electronics, mobile phones, communication and network parts, pharmaceuticals, textiles, food products, solar modules, drones, batteries  etc. and has been a mixed success. True evaluation of its merits and demerits is still a work in progress. This discussion revolves around issues like the scheme payouts encouraging only manufactured units, which could well be simple assemblies as it is not tied to value-addition, less than expected investments and creation of jobs, insignificant increase in net exports, increase in repatriated profits and royalties instead of genuine local R&D, questions on continuance of manufacturing in India after all the incentives end as the supply chain may be easily reversible unlike a scenario of high value addition in India, the scheme not amenable for benefit of local MSMEs and handing out freebies to large domestic and foreign manufacturers etc.

 

But these questions encompass a whole lot of sectors on which I cannot opine on with conviction. But I can try to examine the scheme for IR trains; let us talk of whatever is/was imported for Vande Bharat/LHB coaches at equipment/component/sub-assembly level that IR purchases directly.

 

Wheels: Yes due to lack of capacity. But this story of import is already over with two new plants in India in addition to IR’s own RWF/Bangalore and RWP/Bela as well as the PSU SAIL/DSP. One already under production after years of delay (RINL/Lalganj) and the other ordered on Ms/ Ramakrishna Forge+TRSL consortium.

Axles: No requirement. Only a matter of augmenting the capacity at RWF, which is underway and the rest can be taken care of by Ms/ Ramakrishna Forge+TRSL plant.

 

PLI scheme for these 2 components makes sense (high Capex and large volumes) but will it pass on benefits in retrospect? 

 

Automatic Plug and IC doors: Already indigenized. No imports at present.

Window Glasses: Laminated glasses now used are manufactured locally.

Seats: Already indigenized. No imports.

Brake systems, Gangways, Couplers: Still purchased from multi-nationals but goodvalue addition is now done in India.

Interiors: Very little is imported today unlike the first 2 trains; the quality has indeed gone down but there is no plan to import anything.

Vacuum evacuation system:  Purchased largely from a multi-national but significant value-addition is now done in India and there are Indian manufacturers too.

 

So what would be the prime target for the PLI scheme concerning IR rolling stock? Raw materials for finished Stores that IR buys from vendors? Perhaps chips and ICs, especially given their global shortage that has affected numerous industries. Well, Vande Bharat may have a thousand chips as compared to tens in an automobile but the volumes would be rather low; such a scheme in the background of huge volumes of auto sector can make sense but not for the small requirement for trains, particularly because of huge Capex. Same would be the story for other imports like discreet electronic components, sealed relays, switches and breakers, air spring bellows, small and fractional HP motors, electrical couplers, honeycombs etc. 

One more possible grinch; the market of railway components, including Metros, is directly or indirectly controlled by the agency which would disburse the incentive, the government. There would be real-world implications and benefits of PLI scheme for railways, and therefore, it needs a more nuanced exploration.

 

As for gauging the export potential, while it is no good thinking of exports to developed countries as we are not quite world-class yet and in any case, they are cocooned to buy their own (Europe for Europe, Japan for Japan etc.), the poor countries IR traditionally exports to have no electrified tracks. We need to target middle-income countries which have the money but not the capability to design and manufacture semi-high-speed trains. I doubt if we are doing enough in this direction.

 

Economic Times also reported on 16^th August that two multi-bagger railway stocks jumped up to 5% as the subject PLI scheme was reported. Perhaps because the report also said that there was going to be a huge requirement of Vande Bharat components. Markets react to more to sentiment than realistic prospects so we leave it at that.

 

What more can I say? Let me wait to read the précis encapsulating the wisdom of this consultant to be. I should send them an unsolicited advice, à la Fabian of the bard’s Twelfth Night, that “If this were played upon a stage now, I could condemn it as an improbable fiction.” But then, they would have an assignment to accomplish so why be a spoilsport?

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