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India accelerates EV manufacturing hub ambitions
Government policies seek to reduce oil imports, lower trade deficits and cut carbon emissions
Ashok Lavasa 25 Jun 2024
Ashok Lavasa
Ashok Lavasa

Financial year 2024 (April 1 2023 – March 31 2024) saw consumer choices evolve, raw material prices waver, and supply chains disrupted. Along with several other industries, the automotive sector witnessed many such challenges in India. As it often happens, these challenges provided many opportunities as well. The industry showed resilience and adaptability during the year.

India’s annual production of automobiles in FY2024 reached 23.8 million vehicles, according to the Society of Indian Automobile Manufacturers (SIAM). India has a robust market in terms of domestic demand and exports, and enjoys a strong position in the global heavy vehicles market as it is the largest tractor producer, second-largest bus manufacturer, and third-largest heavy truck manufacturer in the world.

Passenger vehicles (cars) in the country reached an all-time high in FY2024, totalling more than 4.2 million units, with sports utility vehicles (SUVs) accounting for a significant portion of the overall sales.

The outlook for passenger vehicles and commercial vehicles remains positive, though growth is likely to moderate in FY2024-25.

The penetration of battery-powered electric vehicles (BEVs), hybrids and compressed natural gas (CNG) vehicles is expected to increase in the coming years due to government push through various regulations and schemes as well rising customer acceptability for clean or alternate fuel vehicles. Business development in the electric vehicle (EV) and hybrid space is a key focus, with products covering the passenger vehicle, bus, truck and tractor segments.

EV development

Emphasis on sustainability and environmental consciousness is growing across the automotive industry with increasing investment in environment-friendly technologies, such as electric and hydrogen fuel cell vehicles, as well as initiatives to reduce carbon emissions throughout the supply chain. This was visible in the momentum the country witnessed in the shift towards EVs assisted by a regulatory push, improvement in technology, and growing consumer preference. These factors pushed up the growth in EV sales and the level of ambition of automakers.

While the growth rate of EV sales slowed worldwide due to high capital costs, election uncertainties, and a shortage of rapid-charging stations, annual EV sales in India crossed 1.7 million vehicles in FY2024, with electric two-wheelers (E2Ws) accounting for more than 55% market share, followed by passenger electric three-wheelers (E3W Ps) with 32% share. In FY2024, sales in the E2W segment increased by 28%, compared with the previous year, while the combined sales of both passenger and cargo (registered) E3Ws grew by 55%, e-cars by more than 80%, and e-buses by 84%.

Electric cars and SUVs also saw a notable increase, with sales jumping 89% to 90,033 units. In FY2024, India averaged 4,562 EVs sold each day, a significant jump from the 3,242 daily sales in the previous year. This has taken the cumulative EV sales in the country to 41,35,077 units by the end of FY2024. 

Although there are more than a dozen prominent manufacturers in the E2W segment, four players dominated the market with a combined share of 77% in FY2024, growing from 48% in FY2023 and 21% in FY2022.  Similarly, there were five states – Uttar Pradesh, Maharashtra, Karnataka, Tamil Nadu, and Rajasthan – that collectively accounted for over half of India’s EV market share as these state governments have devised their own separate EV policies to bolster the production and purchase of electric vehicles.

Supportive policies

Various other policies have been implemented by both the central and state governments to promote the adoption of EVs and strengthen India’s manufacturing sector. The Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME India) scheme, initiated in 2015 and currently in its Phase II, aims to reduce vehicular emissions and promote consumer purchase.

In addition, the Production Linked Incentive (PLI) scheme for the automotive sector to boost domestic production of advanced automotive technology (AAT) products and another PLI scheme targeting the national programme on advanced chemistry cell (ACC) battery storage to enhance ACC battery production capabilities were launched earlier. These initiatives aim to accelerate EV adoption and enhance the country’s manufacturing landscape.

Recently, the central government has approved a scheme to promote India as a manufacturing destination so that EVs with the latest technology can be manufactured in the country. This policy is aligned with India’s goal of making 30% of new vehicles electric by 2030 and attracting global firms to expand their operations and diversify their market reach in the light of the slowdown in key EV markets like the United States and Europe amid tensions around China.

As the government said in an official press release announcing the scheme, “the policy will provide Indian consumers with access to latest technology, strengthen the EV ecosystem by promoting healthy competition among EV players – leading to high volume of production, economies of scale, and lower cost of production – reduce imports of crude oil, lower trade deficit, reduce air pollution, particularly in cities, while having a positive impact on health and environment”.

From an environmental perspective, India ranks as among the world’s most polluted countries, with Delhi being the one of the world’s most polluted capital. Transitioning more public transport and personal vehicles into using EV technology should have a tangible impact on the PM2.5 levels in urban areas.

Policy highlights

The salient features of the policy are:

  • Minimum Investment required: 4,150 crores (US$500 million).
  • Timeline for manufacturing: three years for setting up manufacturing facilities and start commercial production of e-vehicles.
  • Domestic value addition (DVA) during manufacturing: localization level of 25% by the third year and 50% by the fifth year.
  • Customs duty of 15% (on completely knocked down units) would be applicable on vehicles with minimum CIF (cost, insurance and freight) value of US$35,000 and above for a period of five years, subject to the manufacturer setting up manufacturing facilities in India within a three-year period.
  • The duty foregone on the total number of EVs allowed for import would be limited to the investment made or 6,484 crores (equal to the incentive under PLI scheme), whichever is lower. A maximum of 40,000 EVs at the rate of not more than 8,000 per year would be permissible if the investment is US$800 million or more. The carry-over of unutilized annual import limits would be permitted.
  • The company’s investment commitment will have to be backed up by a bank guarantee in lieu of the custom duty forgone.
  • The bank guarantee will be invoked in case of non-achievement of DVA and minimum investment criteria defined under the scheme’s guidelines.

Reducing emissions

As part of its Nationally Determined Contributions (NDCs) submitted to the United Nations Framework Convention on Climate Change, India aims to reduce the emission intensity of its GDP growth by 45% by 2030 and sees EVs as crucial to this goal.

Government policies such tax breaks, subsidies, and lower goods and services tax (GST) rates are encouraging the adoption of EVs. By 2030, EVs are expected to make up a significant portion of the automotive market, potentially generating US$100 billion in revenue. Factors like cheaper batteries, government incentives, growing consumer awareness, expansion of charging infrastructure, and more EV models are likely to drive this demand.

Historically, the Indian automobile industry has come to be recognized as a standard bearer of the economy. The rising logistics and passenger transportation industries are driving up demand for commercial vehicles. The Automotive Mission Plan (AMP) 2026 envisions India to be among the top three in the world in engineering, manufacturing and export of vehicles and auto components, growing in value to over 12% of its GDP and generating 65 million additional jobs.

In addition, several government initiatives such as scrappage policy and production-linked incentive scheme are aimed at making India one of the global leaders in the coming years. More than anything else, sustainability is likely to be a continuing priority in reducing carbon emissions, increasing the rate of recycling, and promoting sustainable manufacturing practices.

Ashok Lavasa is a former finance secretary of India and vice-president of private sector and public-private partnership at the Asian Development Bank.

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