India has an electrifying future in transport

Nov 25, 2023

India, the world's most populous country, is witnessing a dramatic shift in the electric vehicle (EV) industry, and automakers from many countries are investing in opportunities that the government has made possible through incentives offered to the industry. Sales from electric cars, scooters, rickshaws, and buses are expected to grow exponentially over the next decade.

India is transitioning to electric transportation and opportunities are almost limitless. Many state governments, the biggest spenders, have introduced policies encouraging investment in the EV industry. Such incentives include waiving vehicle registration charges for EVs, reducing motor vehicle tax, and ending parking charges for EVs in public spaces. Various state governments are focussing to modernise public transport by replacing buses using fossil fuels with electric buses.

India's goal is to become the hub for global EV manufacturing. It is hoped that Production Linked Incentive (PLI) schemes for advanced chemistry cells and the automotive sector engaged in manufacturing electric and hybrid vehicles, will enable India to restructure traditional fossil fuel-based automobile transportation systems into environmentally cleaner, sustainable, and more efficient EV-based frameworks.

The government-approved PLI Scheme for the automobile and auto components Industry aims to increase manufacturing capabilities for advanced automotive technology (AAT) products through its budget of INR259 billion (USD 3.1 billion). The scheme provides financial incentives to boost domestic manufacturing of AAT products and to attract investment in the automotive manufacturing value chain. The objective is to reduce costs, create economies of scale and build a robust supply chain for AAT products.

The scheme comprises two parts, the Champion OEM Incentive scheme, and the Component Champion Incentive scheme. The Champion OEM Incentive scheme is sales value-linked, applicable to battery EVs and hydrogen fuel cell vehicles in all segments. The Component Champion Incentive scheme is a sales value-linked scheme, applying only to AAT vehicle components, completely-knocked-down and semi-knocked-down kits, vehicle aggregations of two- and three-wheelers, passenger vehicles, commercial vehicles, and tractors.

There are about 400 electric vehicle start-ups in India. The government supported over 740,000 EVs up to December 2022 under its scheme. Goods and Service Tax (GST) on EVs and EV chargers has been reduced from 12 per cent and 18 per cent respectively, to five per cent. EV subsidies align with India's goal to reduce carbon emissions, focus on renewable energy sources and achieve net-zero emissions by 2070.

However, some companies have allegedly mis-priced vehicles to claim subsidies or have not adhered to localisation standards. Some even allegedly claimed that imported components were locally sourced. To qualify for subsidies under the scheme, at least 50% of the components in EVs must have been manufactured in India and sourced locally. The Automotive Research Association of India verifies this localisation standard before EVs are certified for sale.

Such malpractices have been brought under control by the launch of a system that captures critical data on domestic value additions from the PLI applicant's enterprise resource planning system to the PLI auto portal.

To improve safety, following reports of EVs catching fire, the Ministry of Heavy Industries introduced tests from April 2023. These tests are mandatory in order to claim various incentives and examine the safety and quality of battery packs, battery management systems, and individual cells.

With Tesla's imminent entry into the market, it is hoped that fresh incentives will be introduced or that existing incentives nearing expiry will be extended to the whole EV industry.

Some states have advantages of rail and road connections, abundant raw materials, large pools of skilled and unskilled labour, available power and specific state policies. Such policies encourage large-scale manufacturing, particularly within dedicated industrial parks. Setting up large-scale manufacturing requires that companies comply with local legislation and rules.

These are exciting times for the EV industry, with or without incentives, and India is singularly placed to lead the EV revolution.

Pradyuman Sewar is a partner at Kochhar & Co.

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