IMA Analysis

Wednesday September 22, 2021

EVs in India

EVs in India: The Road Less Travelled

With the Intergovernmental Panel on Climate Change (IPCC) recently signalling ‘a code red for humanity,’ there is a renewed focus on environmental sustainability across the globe. India, the world’s third-biggest greenhouse-gas emitter and home to 5 of the 10 most polluted cities, will need to tackle the issue on a war-footing. Many believe the transition to electric vehicles (EVs) will be a crucial part of the policy mix and, indeed, India has set ambitious targets for itself: at least 30% overall EV penetration by 2030, with some projections going even beyond that. However, on current trends, such goals will be only partially met.

The current EV landscape

Currently, EV’s share of sales is miniscule   

EVs include everything from fully-electric vehicles to hybrids and plug-in hybrids (which are powered by both fuel and electricity). Currently, India’s EV penetration levels are < 1% of total vehicle sales, with 95% of all sales coming from 2/3-wheelers (e2Ws and e3Ws). As with the broader auto industry, Covid-19 has been a dampener and total EV sales fell by 20% in FY21, to 236,802 units. e3W sales fell by nearly 60%, but those of four-wheelers (e4Ws) and e-Buses actually jumped, rising by ~50% and ~100%, respectively, off an extremely low base.

Post-Covid, Asian economies can be bucketed into three broad groups   

Several factors explain India’s slow EV adoption rate so far:

  • Market-related: EV production requires high upfront capital costs, but the Indian market has not yet achieved the necessary scale to justify such investments. In turn, there are consumer concerns around the high price of EVs, as well as their driving range and battery-replacement costs.
  • Technical: The present generation of batteries, while better than previous ones, still suffer from efficiency and lifespan-related constraints. They require long charging times and offer a relatively limited driving range, particularly in India, where consumers tend to over-load their vehicles, either with more people than is recommended, or with other forms of ‘cargo.’
  • Infrastructural: In most parts of the country, the charging infrastructure, though improving fast, remains inadequate. There is also no clarity on issues around battery recycling, and the EV-servicing infrastructure and related manpower are limited.

Big ambitions – backed up by policy

India has signed on to the EV30@30 campaign, but NITI Aayog is aiming even higher   

Despite the slow progress, India’s EV targets have only become more ambitious over the years. In 2017, India signed on to the multilateral EV30@30 campaign, which sets an EV adoption target of 30% of the total vehicle population by 2030, as well as segment-wise ones for private cars (12%), taxis/fleets (25%), buses (30%) and 2/3 wheelers (35%). Going up a few notches, the NITI Aayog is now targeting adoption rates of 30% for private cars, 70% for taxis and fleets, 40% for buses and 80% for e2Ws and e3Ws. This would imply total, cumulative EV sales of about 200 million units between now and 2030 – compared to about 1 million today – valued at over USD 200 billion.

Steps are being taken at both the Central and the state level   

To try and achieve these goals, the Central and state governments have rolled out an alphabet soup of policies/programmes in recent years:

  • The National Electric Mobility Mission Plan(NEMMP) 2020, includes the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME-I I and II) Scheme that aims to promote EVs and hybrids. In June, the government increased the ‘demand incentive’ (i.e., price subsidy) on e2Ws under FAME-II to Rs 15,000 per KWh, up from Rs 10,000 previously. Earlier this year, the government increased the validity of FAME-II eligibility certificates for demand incentives, to a year from the issue date.  
  • The National Mission on Transformative Mobility and Storageand ‘Make in India’ seek to encourage Phased Manufacturing Programmes (PMPs) for EVs, components and batteries locally.
  • Reduced GST rates(from 12% to 5%), exemption from Green Tax and an income tax rebate of up to Rs 150,000 on the interest component of loans taken to purchase EVs.
  • Reduced road tax and registration fees in states such as Delhi.
  • The Production-Linked Incentive (PLI)scheme to incentivise domestic production of ACC (advanced chemistry cell) batteries.
  • Energy Efficiency Services, a Central PSU, has been asked to aggregate demand for 300,000 e3Wsfor multiple user segments, and for e-Buses in 9 cities with populations of over 4 million. This is expected to generate scale economies, bringing the upfront cost of EVs down to levels comparable to that of ICE (internal combustion engine) vehicles.
  • Several state governments offerdemand and supply-side incentives such as scrappage incentives for ICE vehicles, tax exemptions for manufacturers, etc.

A bright future – but the targets may be missed

The goals could be missed, but much will depend on government policy   

It is fair to say that EVs have a promising future in India. But just how promising? In projecting forward, there are far too many variables at play to be able to arrive at accurate estimates for the overall market, let alone segmental ones. It is clear that the NITI Aayog estimates are likely to be missed by some distance. Ultimately, government policy will play an outsized role in determining the speed as well as the segment-wise spread of EV adoption in India.

e4W adoption may be limited at the middle-and-upper ends of the market The taxi/fleet market will be easier to tap   

For instance, to achieve the sort of uptake that is forecast for private e4Ws, auto-makers would need to invest in manufacturing capacity and expertise – but for that to happen, they would have to be convinced that a ready, scalable market exists. Today, completely-built units (CBUs) attract import duties of 60% for cars valued at less than USD 40,000 and 100% for more expensive ones. At the mid-to-upper-end of the market, this could ensure that EVs remain a niche, low-volume market, disincentivising investment. At the other end of the scale, taxi/fleet operators are likely to make the shift in the short-to-medium-term, given the availability of competitively-priced, locally-manufactured EV models. Policy will also play an important role in another respect: fuel tax rates and incentives. Petrol and diesel taxes are a vital source of revenue, particularly for state governments, who may start to baulk at continuing to incentivise EVs if doing so inadvertently eats into their tax base.

Trends in EV ownership are inseparable from those guiding the rest of the auto sector    

Importantly, EV (particularly e4W) adoption will be shaped by the overall trajectory of personal vehicle ownership. In turn, this will be guided by multiple factors – not least the spread of mass-transit solutions. Should public-transport investments (including in e-Buses) pick up steam, it would detract from vehicle ownership, impacting auto sales, including of EVs. At another level, trends in shared mobility and the emergence of subscription-based car business models will shape growth for the overall car market and for e4Ws. (Since fleet/taxi operators are likely to shift to EVs faster than private owners, a rise in shared mobility and/or a shift away from individual ownership will increase EV penetration.)

Market and technology-related factors will also play a role   

Three other market/technology-related developments are relevant. Given that batteries account for as much as 40% of the total cost of ownership, the emergence of Battery-as-a-Service (BaaS) models would substantially reduce the overall cost of EV ownership, encouraging people to make the switch. Falling lithium battery prices – estimated at minus 10% CAGR over 2018-24 – will also make a profound difference. Lastly, it will matter greatly just how fast India’s charging infrastructure – whether privately or publicly owned – gets built.

e2Ws and e3Ws will maintain their lead, and e-Buses will gain traction fast   

Two trends are somewhat easier to forecast. First, e2Ws and e3Ws will maintain or even lengthen their lead, coming closest of any segment to the NITI Aayog targets for 2030. e2Ws will gain from their relatively low upfront costs, generous tax incentives, low and falling operating costs, and from the fact that they are becoming increasingly feature-rich. (These range from mapping and parking software to music players, internet connectivity and, in the near future, say industry insiders, even full-body airbags.) Meanwhile, the rising need for last-mile connectivity, especially in the shared mobility space and as a complement to mass transit, will propel the e3W segment. Second, e-Buses, particularly in the intra-city segment, will gain traction. Thanks to their route predictability, they are fairly undemanding from a charging-infrastructure standpoint. Moreover, they will benefit from state-led buying under FAME-II.

Numerous forecasts have been put out for EVs in India – some overly conservative, others bordering on hyperbole. Cutting through the noise, what is important to recognise is that there will be dips and rises along the way, but the path ahead is still a bright one.

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