Home / Opinion / Views /  What’s Elon Musk’s tiff with Govt of India all about?

The wunderkind of tech manufacturing, Elon Musk, wants India to lower import duty on his Tesla cars, so that these high-performance electric cars can begin to sell in India, the second-most populous country in the world and one of the fastest-growing economies in the medium term, and so a potentially attractive market for his company. Musk has been periodically tweeting, seeking a cut in import duty. On Thursday, he again tweeted. “Still working through a lot of challenges with the government", he wrote in a post giving an update to a query on Twitter. The remark immediately drew a sharp retort from New Delhi. News reports have quoted unnamed official government sources saying that Tesla is free to use the Production-Linked Incentive (PLI) window to produce electric vehicles in India. The businessman, these sources seem to suggest, seeks to pressure India into slashing import duties without offering any commitment to produce here.

Major Indian automotive producers Maruti Suzuki, Tata Motors and Mahindra are opposed to the idea of slashing import duties on automobiles. This is par for the course. But Tesla’s demand for lower import duties runs up against not just the obvious reluctance of local carmakers for aggravated competition but also settled government policy.

The government has been championing indigenous manufacture vociferously. Make in India and Vocal for Local are some of the slogans accompanying such a policy preference. This policy seeks to favour an entire range of manufactured goods, on which import duties have been raised. For a select group of products, the government has also announced the PLI scheme, under which the government gives a cash incentive to producers who meet pre-committed production goals, in terms of volume and time. The hope here is that this policy will incentivize the creation of factory jobs. It is far from clear that the product mix or the policy mix is optimal; many experts have argued that it has not been possible to demonstrate that in the long run, such incentives deliver on the policy objectives. But the PLI scheme is in place now. A range of foreign companies is poised to reap large PLI benefits from the Indian state, because of their domestic manufacturing base.

In the case of electric vehicles, there is an elaborate policy framework in place: Faster Adoption and Manufacturing of Electric Vehicles in India (FAME) was a scheme originally thought up in 2012. The Modi government gave it a concrete shape in 2015. A second iteration was launched in 2019. It primarily seeks to give cash incentives to buyers of electric vehicles, so that their cost of ownership comes down. At the same time, there is a Phased Manufacturing Programme for electric vehicles, under which basic customs duties were raised on a range of automobiles and automotive parts, to encourage domestic production.

Based on this, domestic car companies have invested in producing electric vehicles. Tata Motors has cornered about half the electric car market. Mahindra has announced plans to make a fifth of its output of cars and sports utility vehicles run on electricity by 2027. The basic assumptions underlying such investment would be derailed if the government were to change its import tariffs under pressure from Tesla.

Accepting Elon Musk’s demand for lower import duties on electric cars would mean upsetting the existing policy regime for promoting indigenous manufacturing and the Phased Manufacturing Programme. On the other hand, if Musk were to set up shop in India, Tesla would jump the tariff barriers and use India as a manufacturing base.

Right now, Tesla would probably import Teslas made in China, where it has set up almost half its global capacity. That would be an additional source of discomfiture for India, facing not only encroachments across the Line of Actual Control but also a trade balance heavily tilted in China’s favour (of the total trade between the two countries, India’s exports are about a quarter, while imports from China make up the balance).

The way out of the impasse would be for Tesla to take a leap of faith and set up a manufacturing base in India, taking advantage of the incentives offered under FAME 2 and its Phased Manufacturing Programme, complete with PLI. Any special dispensation tailormade for Tesla would be a policy flip-flop. It makes little sense to disturb settled policy, regardless of whether it is sound or less-than-sound, and as a fallout put at risk investments companies have lined up in response to the policy.

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