New EV Policy: Reduced Import Duty May Lead To New EV Ecosystem In India

The policy slashes import duties on certain kinds of electric cars to 15 per cent, from the previous levels of 60-100 per cent. The move by the government has enabled the entry of these cars into the Indian market at reasonable rates.  

However, this duty relaxation is conditional on the vehicle manufacturers agreeing to set up production facilities in India with adequate localisation. The cut in import duties was precisely the kind of incentives that were being sought by major global EV manufacturers for setting up production units in the country.

The new policy says that if a company invested at least Rs 4,150 crore, or US$ 500 million, in setting up an EV manufacturing facility in India, it would be eligible to sell its foreign-made cars in the country at the reduced import duty.

There are several other conditionalities attached, including a mandatory 50 per cent localisation to be achieved by the fifth year of its operations in India. However, the policy goes far beyond the immediate expected fall-out of leading electric cars becoming available in the Indian market.

It seeks to serve several objectives—boost manufacturing capabilities in the country, expedite decarbonisation of the road transport sector, accelerate the transition to electric vehicles, and help India reach its net zero target.

The new policy is meant to supplement several other initiatives that have been taken to accelerate the adoption of electric vehicles in the country. The most important of these have been FAME, or Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles, whose second phase is currently under implementation.

Electric Mobility

Road transport is one of the major contributors to greenhouse gas emissions. In India, it accounts for about 12 per cent of energy-related carbon dioxide emissions, which itself was about 75 per cent of all emissions from India.

International Energy Agency (IEA) estimates that emissions from the road transport sector in India could double by 2050 owing to increased demand for private mobility and greater need for transporting people and goods.

Decarbonisation of road transport has been a global priority in recent years. Technology for electric vehicles has been available for quite some time, but it is getting more affordable, thanks partly to the range of incentives being offered, not just in India but in almost every country.

There is an opportunity for a quick transition to electric vehicles, not just in the passenger category, like cars, but even trucks and buses. According to the World Resources Institute (WRI), about 10 per cent of all passenger vehicles sold globally in 2022 were electric, which is over ten times more than what it was just five years ago.

In 2018, Transport Minister Nitin Gadkari had announced, a bit prematurely as it later turned out, that India would manufacture and sell only electric cars by 2030.

That was too ambitious a goal and has been revised since. Only about 30 per cent of all passenger cars and 70 per cent of commercial vehicles are now supposed to become electric by 2030. But even this is a big challenge.

Recent data presented by the government in the Parliament show that only 1.22 per cent of existing vehicles in India (43.78 lakh out of about 36 crore) were all-electric or hybrid. Nearly 80 per cent of these are two and three-wheelers.

But the pace of adoption is growing. EVs accounted for about 1.8 per cent of new vehicle sales in 2021, and 4 per cent in 2022, according to IEA data. By the year 2030, about 35 per cent of vehicle sales in India are expected to be EVs. But IEA says this share needs to reach 50 per cent for India’s road transport sector to remain on track for the 2070 net zero goal.

In a recent study IEA said, "By 2030, India’s EV fleet will avoid about 5 million tonnes of CO2, while in 2050, the amount could range from 110 to 380 million tonnes of CO2, depending on the EV fleet size and the pace of power sector decarbonisation. EV deployment can also considerably reduce citizens’ exposure to air pollution.”

Getting Global Leaders

Almost every auto company operating in India has introduced electric vehicles, across all vehicle categories. These include homegrown companies like Tata Motors or Mahindra.

However, getting a company like Tesla, known for its innovation and perceived not only as an automaker but as a tech company as well, to manufacture its cars in India could be a game-changer.

Tesla has already indicated that it is keen on making cars in India. Its CEO Elon Musk had a much-publicised meeting with India’s Prime Minister Narendra Modi last year, which led to speculation about an impending investment by Tesla in India.

In January this year, The Hindustan Times reported, citing information from company officials, that Tesla was preparing to invest as much as US$ 30 billion in India over the next five years. If true, it would be the single largest foreign investment in India, ever.

However, the high import duties on foreign-made EVs were hurdles in Tesla’s plans. The new policy addresses that issue to a considerable extent, opening the way for Tesla and its competitors to enter the Indian market.

The restrictions have not all gone, however. There are limits on the number of cars over which the reduced import duty would be applicable—a maximum of 40,000 at the rate of not more than 8,000 per year, if the company’s investment in India was more than US$ 800 million.

The Indian government is betting heavily on the new policy. Companies like Tesla moving into India is not just about setting up another car-making facility, it could lead to the creation of a new EV ecosystem and several technology off-shoots.

But more importantly, it would send out strong signals to other investors, across the spectrum, looking at India with interest. The impact on the Make In India programme, and the overall economy, would be significant.

(The author is Deputy Editor with The Indian Express. He has been covering environment and climate change for more than two decades. Views expressed are personal.)