Union Budget 2026: Auto PLI Allocation Doubles to ₹5,940 Crore Amid EV Push

The Union Budget 2026-27 has signaled a strong commitment to the domestic automotive sector by doubling the allocation for the Production-Linked Incentive (PLI) scheme for Automobiles and Auto Components. Finance Minister Nirmala Sitharaman earmarked ₹5,940 crore for the scheme for the 2026-27 fiscal year, a substantial jump from the budget estimate of ₹2,818.85 crore in the previous year. This move comes despite a lower-than-expected utilization of funds in FY26, where the revised estimate stood at ₹2,091 crore.

Significant Boost for Auto PLI Allocation

The ₹25,938 crore PLI Auto scheme was originally designed to catalyze the manufacturing of advanced automotive technology (AAT) products, with a primary focus on battery electric vehicles (BEVs) and hydrogen fuel cell vehicles. The sharp increase in the FY27 allocation suggests that the government expects a significant ramp-up in production and incentive disbursements as approved applicants reach their investment and sales milestones. As of September 2025, the scheme has already attracted cumulative investments of ₹35,657 crore and generated nearly 49,000 jobs.

Understanding the Underutilization in FY26

While the allocation for the upcoming year has increased, the current fiscal year saw underutilization of the budgeted funds. Revised estimates for FY26 peg the utilization at ₹2,104.57 crore, lower than the initial budget estimate of ₹2,974.61 crore. Ministry of Heavy Industries officials noted that several Original Equipment Manufacturers (OEMs) failed to meet their targeted sales volumes or could not satisfy the mandatory Domestic Value Addition (DVA) requirements. However, the ministry remains optimistic, seeking even higher allocations of up to ₹9,500 crore for the final years of the scheme ending in 2028.

The Advanced Chemistry Cell (ACC) PLI Setback

In contrast to the auto components sector, the PLI scheme for Advanced Chemistry Cells (ACC) faced a steep cut in its budgetary outlay. The allocation was reduced by 44.5 percent, falling from ₹155.76 crore in FY26 to ₹86 crore in FY27. This reduction follows a slow start in the battery cell manufacturing space. As of late 2025, only 2.8 percent of the targeted 50GWh capacity had been commissioned, with Ola Electric being the sole beneficiary to commence commercial operations. Other major players like Reliance New Energy are expected to commission their awarded capacities in subsequent phases.

Supply Chain and Implementation Bottlenecks

The slow progress in battery localization is attributed to several implementation hurdles. Beneficiaries have struggled with stringent DVA requirements, which mandate that at least 50 percent of a product's value be generated domestically. Additionally, an aggressive two-year installation timeline and delays in securing visas for technical specialists required for equipment installation have hampered capacity commissioning. These bottlenecks have led to a cautious approach in fiscal allocations for the ACC segment.

PM E-DRIVE and Demand-Side Incentives

The budget also adjusted the funding for the PM Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) scheme. For FY27, the government earmarked ₹1,500 crore, a decrease from the ₹4,000 crore budgeted in FY26. However, this is still an increase over the revised estimate of ₹1,300 crore for the current year. The PM E-DRIVE scheme remains a critical pillar for supporting the adoption of electric two-wheelers, three-wheelers, and electric buses through payment security mechanisms.

Budgetary Allocation Comparison Table

The Startup Demand for Inclusive Policies

A significant point of contention remains the eligibility criteria for the PLI scheme. Currently, OEM applicants must have a global group turnover of at least ₹10,000 crore and an investment of ₹3,000 crore in fixed assets. These high thresholds effectively exclude new-age tech companies and startups like Ather Energy, River, and Euler Motors. These firms have proposed a dedicated innovation-linked PLI sub-window with relaxed norms to allow smaller, R&D-focused players to access incentives.

Rare Earth Corridors and Magnet Manufacturing

To further strengthen the EV supply chain, the government announced the support for dedicated rare earth corridors across Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. This initiative follows the approval of a ₹7,280 crore scheme for manufacturing sintered rare earth permanent magnets (REPM). These magnets are essential components for EV traction motors. Currently, India relies heavily on imports for these materials, and the new scheme aims to establish 6,000 metric tonnes of integrated manufacturing capacity.

Customs Duty Relief for Lithium-Ion Cells

In a move welcomed by the industry, the budget extended the basic customs duty (BCD) exemption on capital goods used for manufacturing lithium-ion cells. This exemption now includes batteries for stationary energy storage systems, broadening the scope beyond just electric vehicles. Furthermore, the validity of existing BCD exemptions on lithium-ion cells and related raw materials has been extended by two years, until March 31, 2028, providing policy stability for manufacturers.

Market Impact and Industry Sentiment

Industry leaders have reacted positively to the budget's focus on infrastructure and manufacturing. The increase in public capital expenditure to ₹12.2 lakh crore is expected to have a multiplier effect on the automotive market by improving road quality and logistics. Executives from Tata Motors, Hyundai India, and Mercedes-Benz noted that the focus on rare earths and battery localization will reduce critical import dependencies and position India as a global high-tech manufacturing hub.

Analysis: Balancing Ambition with Reality

The Union Budget 2026-27 reflects a strategic shift toward rewarding performance while acknowledging implementation realities. The doubling of the Auto PLI outlay suggests that the initial investment phase is transitioning into a production phase. However, the cuts in ACC PLI and PM E-DRIVE allocations indicate a more calibrated approach to fund disbursement based on actual ground-level progress. The government's willingness to examine startup proposals for a sub-window could be the next step in making the incentive framework more inclusive.

Conclusion

The 2026-27 budget provides a clear roadmap for the Indian automotive industry, emphasizing localization and advanced technology. While challenges regarding domestic value addition and startup inclusion persist, the increased fiscal support for the Auto PLI and the new focus on rare earth magnets provide a solid foundation for the sector's growth. As production scales up in the third year of the PLI scheme, the industry is poised to move closer to the goal of becoming a global hub for green mobility.