India may want more EV parts to be made locally. It may not be entirely feasible.
Summary
- Will India's electric vehicle ambitions be derailed by stricter localization rules? Or will the move accelerate domestic manufacturing and create a more sustainable EV ecosystem?
India's electric mobility ambitions are about to face a new test. The government is poised to tighten localization rules for electric vehicle (EV) manufacturers within the next month, following consultations led by the Automotive Research Association of India (ARAI), according to two people familiar with the development.
As the government prepares for the launch of the third phase of its flagship scheme for faster adoption and manufacturing of (hybrid and) electric vehicles (FAME), the heavy industries ministry is revisiting the Phased Manufacturing Programme (PMP) for EVs, these people said.
The PMP defines the localization guidelines for manufacturing of EVs and their components. A March 2024 notification reduced the number of components eligible for import under these rules from 18 to 13.
"We will hear from ARAI (Automotive Research Association of India) in about a month or so," said one of the people cited above. "A revision (in the PMP) can change the specific types of domestic products that manufacturers will be mandated to use," the person said, adding that the Centre may also tighten guidelines to boost domestic EV components production.
Read this | FAME woes: Okinawa fails legal bid seeking stay in govt recovery proceedings
This tightening of licalization rules is part of a broader strategy to boost domestic manufacturing capabilities, a key tenet of India’s Atmanirbhar Bharat (self-reliant India) vision. The ministry’s review will determine which components can be feasibly produced at scale in India, with allowances for imports only when domestic production is not viable.
"Take any component, for instance. If we know that we cannot make it here immediately, we will allow OEMs (original equipment manufacturers) to import them," said the person cited earlier.
FAME, launched in 2015, is aimed at encouraging the sale of electric and hybrid vehicles. The first phase of the scheme ran till 2019 and the second phase ended in March this year. After FAME-II concluded, the government rolled out Electric Mobility Promotion Scheme (EMPS), with an outlay of ₹778 crore, solely for electric two- and three-wheelers, with an initial run-time of four months, which was later extended till September.
The implications for OEMs
For OEMs, this impending tightening could trigger a significant shift in their operational strategies. The PMP is crucial because only manufacturers that comply with its criteria are eligible for government incentives under schemes like FAME and the EMPS.
More here | Will electric cars miss out on incentives in Fame III?
Past government notifications have already laid the groundwork for reducing reliance on imports.
A 2021 notification initiated a phased strategy to curb imports of 18 critical EV components by gradually increasing import duties. This allowed manufacturers to import parts such as HVAC systems, circuit breakers, body panels, traction battery packs, and traction motors until specified deadlines to qualify for FAME-II incentives. All other components necessary for EV manufacturing were mandated to be produced, sourced, and tested domestically, as per the notification.
Notably, the government included an exception allowing the import of components for traction battery packs—the primary energy storage units in EVs—for local assembly of the final product.
The anticipated tightening of directives comes at a time when Indian OEMs are under pressure to compete with Chinese manufacturers, who benefit from extensive capital support and have established themselves as global suppliers.
And this | FAME-3 is coming; and here is what changes for EVs
“The key battle in the EV market is to compete with Chinese manufacturers," said Pradeep Karuturi, lead at the Centre for Clean Mobility, OMI Foundation. “Indian OEMs would require massive amounts of money, often in thousands of crores, to build capacity and compete against China as global suppliers."
As localization requirements increase, Indian manufacturers may need to ramp up investments in domestic production facilities, particularly for components like batteries and motors, which have historically been imported. This shift could drive up production costs, potentially impacting the pricing of EVs in a market that is already price-sensitive.
"More localization will lead to a gradual dip in prices in the long run, as India's manufacturers of EVs and their components reach economies of scale," said Karuturi of OMI Foundation, adding that substantial investments will be necessary to reach these economies of scale, and that tightening localization rules would encourage such investments.
However, the transition is not without its risks. If domestic production fails to meet the required scale or quality, manufacturers could face higher costs, which may be passed on to consumers, industry experts warned. This would be particularly challenging in a market where EV adoption is still in its nascent stages.
EV adoption: The road ahead
Despite the challenges, EV adoption in India is gaining momentum, albeit unevenly across different vehicle segments. While the penetration of electric three-wheelers has seen significant growth—accounting for more than half of all three-wheelers sold since 2018—other segments lag behind. As of August 2023, EVs accounted for a miniscule 1.99% of all four-wheelers sold in India, and 5.28% of two-wheelers.
Also read | Govt dithers on subsidy, EV makers fear losing fame
The success of FAME-III, when rolled out, will hinge on how effectively the government can balance the need for increased localization with the realities of the market. The revised PMP rules will play a crucial role in shaping the future of EV manufacturing in India, determining whether the country can transition from a major consumer of imported EV technology to a global leader in EV production.