Illustration: Jayachandran/Mint
Illustration: Jayachandran/Mint

Opinion | The road to e-vehicle adoption in India

An uncertain policy environment and the lack of supporting infrastructure are major roadblocks

The rupee’s dramatic depreciation in recent months has had an unexpected victim. The Indian electric vehicle (EV) industry has been hit hard. The reason for this is telling: local production of inputs for EVs is at just about 35% of total input production. Companies that are in the midst of processing orders for electric cars and buses will now see their production severely affected in terms of production costs. This neatly sums up some of the challenges facing India’s e-vehicle push.

The government’s ambitions notwithstanding, the Indian EV market currently has one of the lowest penetration rates in the world. There are multiple layers to this.

The first has to do with policy volatility. E-mobility is a nascent industry in India—and in most countries, for that matter. Capital costs are high and the payoff is uncertain. This is not an inviting situation. A firm policy direction can ameliorate these risks somewhat. That has been hard to come by. The unrealistic quasi-policy statement that all new vehicles should be e-vehicles by 2030 is a prime example. Thankfully, that has been toned down to 15% of all vehicle sales in the next five years, although going by the present scenario, that isn’t particularly realistic either.

The Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles (Fame) framework has been extended repeatedly. Fame II, which, until recently, was to have been launched at the beginning of this month, has been put on hold. According to various reports, Prime Minister Narendra Modi is unhappy with its current shape and may want to shift the focus from subsidizing vehicles to subsidizing batteries. This has merit. Batteries make up 50% of EV costs. There have also been murmurs from the government about increasing focus on incentivizing electric two-wheelers. This too makes sense. Two-wheelers account for 76% of the vehicles in the country and most of the fuel usage—and are currently seeing much better uptake of e-vehicles than cars.

That said, this change in direction is unlikely to leave manufacturers feeling particularly confident. And inconsistencies remain. For instance, while electric vehicles are taxed at 12% under the goods and services tax (GST), batteries were taxed at 28% until recently. This has now been lowered to 18%—but the discrepancy still sits uneasily with the potential switch in Fame II’s focus.

Second, this lack of policy certainty spills over into perhaps the single most important element of enabling e-vehicle usage: charging infrastructure. Considering that the present fleet of Indian EVs is incapable of traversing even city distances without running out of charge, a wide network of charging stations is imminent for attracting investment.

There has been some positive movement here this year, with the Union power ministry categorizing charging of batteries as a service, which will help charging stations operate without licences. But plenty remains to be done: addressing technical concerns like AC versus DC charging stations, handling of peak demand, grid stability, and the like.

There is another issue here as well. If a switch to e-vehicles is to have any significant effect on pollution, the sector cannot be seen in isolation. An EV, after all, is only as clean as the electricity source it uses. In India, thermal sources account for about 65% of capacity. As Rahul Chawla has written in Mint (https://goo.gl/sj9T7i), a systems approach is important here; the e-vehicles and renewables industries must be seen in conjunction.

Third, localization is another tricky area, as the strife caused by the rupee’s depreciation has shown. India does not have any known reserves of lithium and cobalt, which makes it entirely dependent on imports of lithium-ion batteries from Japan and China. It is now scrambling to acquire mines in Latin America and Australia. But that will not be enough. Private investment in battery manufacturing plants and developing low cost production technology is a must.

Automobile manufacturers are in it for the bottom line. They are unlikely to raise e-vehicle and battery capex in when demand is uncertain and they will not achieve economies of scale. This sets up a catch-22 situation where quality remains poor, and thus demand dormant. Some form of government support is necessary to break the impasse; no country has managed to make headway in e-vehicle adoption without this so far.

But a brute force subsidy approach is not the answer in an industry where there is, as yet, no certainty about what the right solutions are and manufacturers are likely to continue experimenting. Stabilizing the policy environment when it comes to taxes, non-fiscal incentives and the infrastructure needed to tackle range anxiety will go further.

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