Driving EV adoption: Increase incentives, cut duties with sunset clauses

By: |
October 27, 2020 12:30 AM

Even as the government celebrates FAME-2 and the 20% jump in sales of electric vehicles, from 1.3 lakh in FY19 to 1.56 lakh in FY 20, India Ratings fears a loss of momentum where the penetration of EVs is concerned, especially in the personal vehicles segment.

With the automobile sector bruised by the pandemic, the government will likely focus on steering a recovery there; this could hurt the EV segment as customers remain wary of buying the more expensive EV vehicles.

Even as the government celebrates FAME-2 and the 20% jump in sales of electric vehicles, from 1.3 lakh in FY19 to 1.56 lakh in FY 20, India Ratings fears a loss of momentum where the penetration of EVs is concerned, especially in the personal vehicles segment. With the automobile sector bruised by the pandemic, the government will likely focus on steering a recovery there; this could hurt the EV segment as customers remain wary of buying the more expensive EV vehicles.

While, on average, electric two-wheelers are estimated to be around 33% costlier than fossil-fuel ones, the difference for cars can be as high as 100%. Consequently, sales of electric buses may not suffer too much of a setback as state governments step in to make purchases for their transport fleets; again, transport operators in the private sector too might not be averse to owning EV vehicles. The demand for electric two-wheelers too may not slide much. Nonetheless, a fall in demand for EV vehicles, even if a slight one, would, in turn, stymie investments as OEMs remain shy of incurring capital expenditure.

Which is why the government would do well to increase support for EVs, even if both the states and the Centre have already done a fair bit. Delhi recently waived road tax for EVs while the GST Council allowed the segment to be moved into the 5%-rate bracket. However, if India is to push up the penetration of personal EVs from the current 0.1%—the global penetration in this category is 2.7%—costs need to come down meaningfully for buyers, especially with affordability having been hit by the pandemic. Much of the problem arises out of higher import duties on EVs and lower incentives on personal vehicles. While the government’s incentives for electric buses covers 35-40% of the cost, for personal vehicles, barely 20% of the cost gets covered and that too for vehicles that cost less than Rs 15 lakh.

The incentives for two-wheelers, although higher, cover only a small share of the market. In contrast, the UK government compensates for 35% of the cost and China, in the initial years, covered 30-50%.

In the budget for 2020-21, customs duties on EVs and components were raised by at least 5-15%. Given that a fair share of the components are still not made locally, this pushed up the cost of manufacturing. It might help if the government lowered duties for a limited period of three years—with a sunset clause—to bring down the cost of production. This should encourage capacity creation for components as well. While the cost of batteries has fallen 87% in the last decade, manufacturing must also be pushed here. Setting up a charging infrastructure is also critical.

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