Specialty steel gets special incentives

How will the recent production-linked incentive scheme for specialty steel impact the industry

Key Takeaways:

• In July 2021, the Indian government announced production-linked incentives for the specialty steel industry

• The scheme provides financial incentives to promote manufacture of specialty steel in the country

• The government has planned an outlay of Rs 6322 crore towards this scheme

Introduction to PLI

In the 2021-22 budget in February this year, the finance minister announced an outlay of 1.9 lakh crore for production-linked incentive schemes across 13 sectors. Of these, PLI schemes for three sectors had been approved in March 2020 and 10 sectors in November 2020.

In July 2021, the cabinet gave its nod for PLIs in specialty steel. Many industry insiders believe this could be a game-changer for the industry. 

So, what exactly is a production-linked incentive and why is the government offering them?

The fundamental idea behind the incentive scheme is to boost domestic production by offering financial incentives to manufacturers. The incentive is offered as a percentage of incremental sales and varies from sector to sector – ranging from 4-15%.

PLIs are aimed at achieving many objectives:

• Increase domestic production

• Reduce imports

• Make Indian products more competitive both domestically and internationally

• Attract investments, both domestic and international

• Create a greater number of jobs

PLI and the steel sector

The PLI scheme for specialty steel, announced in July 2021, has been whole-heartedly welcomed by the steel industry. 

Though India is the second largest producer of steel in the world, specialty or value-added steel accounts for only 18% of the total. In 2020-21, specialty steel accounted for 18mt of the 102mt steel produced in the country. India was a net importer of value-added steel (4mt), resulting in a forex outgo of Rs 30,000 crore.

The incentive scheme aims to boost the manufacture of higher grades of steel in the country and reduce our dependence on imports and reduce input cost for downstream MSME manufacturers.

What are the incentives and for whom?

The specialty steel PLI scheme offers three slabs of incentives with the lowest being 4 per cent and the highest being 12 per cent. These incentives are offered on incremental sales across five categories of specialty steel over the next five years. The first incentive will be payable in FY23-24 based on incremental sales achieved in 2022-23. 

The incentive pay out is calculated according to the following formula:

A: Incremental sales in current year over previous year (or base year)

B: Weighted average sale price (exclusive of tax) in the current year 

C: Weighted average sale price (exclusive of tax) in the base year

Incentive = (A/B) x (lower of B or C) x (PLI rate as applicable / 100) 

What categories of specialty steel are eligible?

Five categories of specialty steel are covered:

• High strength/ wear resistant steel

• Coated/ plated steel products

• Alloy steel products and steel wires

• Specialty rails

• Electrical steel

The incentives are based on the category of steel being manufactured. For example, electrical steel or cold rolled grain-oriented steel gets the maximum incentive of 12%.

Who is eligible to apply for the incentives?

There are no special eligibility criteria. Any company manufacturing specialty grades of steel can apply for the scheme. The only condition is that the input material should have been melted or poured in India to ensure that the products are manufactured end-to-end in India.

The potential impact of the PLI

• Total incentives: Rs 6322 crore

• Additional investments expected: Rs 40,000 crore

• Employment: 525,000 jobs including 60k direct jobs

• Capacity addition: 25mt

Besides these benefits, the PLI scheme for specialty steel is expected to achieve three key outcomes: 1) reduce our dependence on imports for value-added steel, 2) reduce supply chain issues for local manufacturers as more specialty steel will be manufactured end-to-end in India and 3) increase investments in technology in the sector and, ultimately, enable the domestic industry to produce higher and higher grades of steel.