The automobile sector in India is growing rapidly, with over 21.5 million domestic sales in financial year 2020 across all segments. Globally, the industry is in the midst of an accelerated transition from internal combustion engine (ICE)-based vehicles that guzzle fossil fuels to battery-based electric vehicles (EVs), which are eco-friendly and economical.
In 2019-20, less than 1 per cent of the vehicles sold in India were EVs, indicating that the industry is at a nascent stage as compared to the US, China, South Korea, Japan, etc., where EVs account for a greater portion of vehicle sales on account of wider availability and higher incomes. Despite the compelling case for adoption, the success of EVs in India has been constrained by weak customer appetite and infrastructural roadblocks, among other factors. Many EVs introduced in India have fallen short of customer expectations due to concerns regarding upfront costs, range, speed, battery life and battery technology. The coronavirus outbreak and subsequent lockdowns have also taken a toll on the automotive industry, slowing down the shift to EVs as several projects have been deferred.
Policy framework to promote EVs
Policymakers in India have been actively promoting EV adoption in recent years. Government think tank NITI Aayog has specified that Faster Adoption and Manufacturing of Hybrid and Electric Vehicles II (FAME II) and other policies supporting electric mobility are expected to drive EV sales to 30 per cent for private cars, 70 per cent for commercial cars, 40 per cent for buses and 80 per cent for two-wheelers and three-wheelers by 2030. Moreover, in order to promote domestic players and deter the import of semi-knocked-down and completely built units, the government has raised the import duties on such goods.
Several state governments have introduced EV-specific policies focused on supply-side incentives to attract investment and generate employment in their respective states. States like Andhra Pradesh, Uttar Pradesh, Tamil Nadu and Telangana offer incentives such as capital interest subsidy, stamp duty reimbursements, tax exemptions, SGST reimbursement and interest-free loans to promote EV manufacturers. Although a few states like Bihar, Maharashtra and Punjab have offered demand-side incentives in the form of monetary incentives, road tax and registration fee exemption, etc., the primary focus of these policies has been supply-side incentives. The recently introduced EV policy of the Delhi government also lays emphasis on demand-side incentives. The policy offers purchase incentives for EVs and scrappage incentives for ICE vehicles.
However, there are key gaps in the existing policy system that need to be addressed. The state EV policies need to lay greater emphasis on demand incentives that bring down the upfront cost differential. Other states also need to introduce demand-side financial incentives on the lines of Delhi, Gujarat and Bihar. Further, the quantum of incentives should be meaningful enough to drive EV adoption. State-level EV policies should focus on promoting the development of charging infrastructure. The government needs to develop end-of-life and scrapping policies for sustainably recycling/disposing of the vehicles, especially their batteries, which are detrimental to the environment.
Enabling environment and building charging infrastructure
The development of the battery industry, charging infrastructure and local supply chains is critical for EV adoption. With the objective of transforming India into a manufacturing and export hub, the government has been promoting the localisation of production across the EV value chain. In March 2019, the government announced the National Mission on Transformative Mobility and Battery Storage, a five-year phased manufacturing programme running till 2024, to support the development of large-scale, export-competitive integrated batteries and cell manufacturing giga plants in India.
The government is currently weighing plans to incentivise domestic battery manufacturing. In January 2020, NITI Aayog sought cabinet approval for a proposal to provide subsidies to investors setting up giga-scale manufacturing units for lithium-ion batteries used in EVs. NITI Aayog, in a recent proposal to the union cabinet, recommended incentives of $4.6 billion by 2030 for companies manufacturing advanced batteries. As per the proposal, cash and infrastructure incentives of $122 million will be provided during financial year 2022, which may be increased annually.
Currently, China, Japan and the US are in the lead in terms of lithium-ion cell production. India does not possess the necessary raw materials such as cobalt, lithium and graphite in abundance, and thus cannot produce these batteries at a low cost. That said, India could leverage its existing capability of manufacturing EV components, such as wire harnesses, permanent magnets, BLDC motors, AC induction motors, thermal and cooling management systems, electronics (other than semiconductors) and plastics, to be a leading player worldwide.
Across the world, electricity distribution companies and oil and gas players are developing solutions and entering into partnerships in the EV charging infrastructure space. Hence, the deployment of charging stations across the nation is very critical. In order to enable faster adoption of EVs, the government has issued guidelines and standards for public charging infrastructure. Based on the proposals received, the Indian government recently sanctioned 2,636 (public) charging stations in 62 cities across 24 states/UTs, to be installed by 19 public entities. Of these, 1,633 charging stations are expected to be fast charging stations and 1,003 slow charging stations. With this, approximately 20,000 charging points are expected to be installed across select cities.
The battery is the most expensive component of an EV, accounting for over half the cost of the automobile. Also, EVs face the problem of charging considering the lack of charging stations. There are several alternative business models to resolve these problems.
Leasing or subscription model: Under this model, EVs are sold on lease for 13-36 months without any upfront costs. This is very convenient for commercial segments such as delivery portals, which use their vehicles intra-city for day-to-day operations.
Battery subscription model: This entails selling EVs without the battery and allowing consumers to lease/buy it from the manufacturer as per their requirements and budget. The government has allowed two-wheeler and three-wheeler companies to sell their vehicles without batteries. This model is, however, rendered unsuitable because of the huge variances in battery designs and the incompatibility of batteries across different vehicles. The standardisation of batteries would imply that different battery manufacturers will be reluctant to invest in research and development owing to the constraints of standardisation.
Battery swapping model: Under this, recharged batteries are exchanged at charging places for drained batteries for a periodic fee. The basic requirement for this model is a widespread network of battery stations so that customers can rely on this service. A major advantage of this model is that users save the time lost in charging batteries, making this model extremely reliable and optimal for long distance commercial vehicles and buses.
Charging as a service model: Users charge their vehicles on a pay-per-use or subscription method. This method is widespread globally and requires the deployment of a large network of charging stations.
While all these innovative models are focused on driving mass adoption of EVs, most of them are still evolving and there is yet to be a dominant model.
The way forward
EVs are on course to be a game changer for the automobile industry, with two- and three-wheeler segments likely to lead the adoption curve. The running cost of EVs is much lower than that of ICE vehicles (one-tenth), making a strong case for a shift to EVs in the business-to-business (B2B) segment. Many large B2B players in e-commerce, grocery, food and courier delivery have been piloting EVs and some have moved to advanced stages of deployment. New business models are also being established, such as pure-play energy operators owning and managing battery manufacturing. However, the success of such models has been limited as EV penetration remains low with most of the growth concentrated in e-buses and passenger taxis.
In sum, India will be able to reduce its emissions and the import bill on oil by transitioning to EVs. The two-wheeler and three-wheeler markets are ripe for a transition from an economic and viability perspective, but the four-wheeler markets will take until 2025 to be at same level as ICE vehicles. The government and private players are collaborating on the installation of charging stations. Further, our considerable competitive edge in the manufacturing of auxiliaries associated with EVs could provide us a much-needed head start in EV manufacturing to compensate for India’s lack of raw materials.
In sum, India’s EV story holds great promise, with factors such as enabling policy measures, infrastructure development and TCO parity driving long-term growth.
Based on a KPMG-CII report, “Shifting Gears: The Evolving Electric Vehicle Landscape in India,” released in October 2020