By Amit Kapoor,
Over the last five years, the electric vehicle (EV) industry in India has undergone a remarkable transformation, evolving from a niche segment to a critical driver of growth and innovation in the automobile sector. For India to position itself as a global player in the EV revolution, it is essential to maintain its growth momentum as it strives to attain its EV30@30 goals. In 2024, however, there has been a slight decline in EV passenger sales, as opposed to the impressive growth rates of more than 100% showcased since 2022. This deceleration isn’t unique to India; the global EV industry is also facing a slowdown. Therefore, understanding the key drivers and impediments to this recent shift in EV growth becomes essential to recalibrate the policies to ensure India progresses swiftly in its electric mobility journey.
The year 2023 saw the Indian EV market record its highest sales to date, with around 1.5 million units and the four-wheeler segment registering a staggering 110% growth year-on-year (y-o-y). However, in the first four months of FY25, 4.7 lakh units of EVs were sold in India, down 3.13% from last year. The decline was mainly caused by the weak performance of the two- and four-wheeler segments, both experiencing a fall of 11% y-o-y. This decline in the sales trajectory set against the background of India’s ambitious 30% penetration target set under the EV30@30 goal is a concern that merits attention. Even with unparalleled growth rates since 2022, India’s EV sector was able to reach a meagre 2.13% penetration in the overall passenger vehicle market. At this juncture, the nation cannot afford a reduction in these numbers if it aims to achieve its environmental and economic imperatives.
Many factors contribute to the low EV penetration numbers in the economy. The primary culprit behind the low adoption of EVs is their high price compared to traditional internal combustion engine (ICE) vehicles, making the former a less financially viable option. An analysis of the automobile market shows that there are only three EV models within the average purchasing power bracket (i.e. below `10 lakh) as opposed to more than 50 models of ICE vehicles in the same price range. Despite low running costs, a very selective range of EVs in the price bracket discourages widespread adoption.
The government of India has acknowledged the significance of this issue at various levels. It has established comprehensive demand-driven incentives promoting adoption and raising demand for EVs. In 2015, it launched the first phase of its flagship Faster Adoption and Manufacturing (of Hybrid and) Electric Vehicles (FAME) policy, which was further supplemented by a second phase in 2019. Under both phases of the policy, major demand-driving incentives were provided to consumers through subsidies of up to `10,000 per kilowatt hour for four-wheelers; this reduces the price of many vehicles by up to `1.5 lakh for consumers. With FAME-II finally ending in March, the government launched the Electric Mobility Promotion Scheme (EMPS), providing subsidies for purchasing two- and three-wheeler EVs.
Moreover, since 2019, the government has moved EVs to the lowest goods and services tax slab at 5% as opposed to ICE ones, which remain taxed at 28%. At the state level, all states have exempted registration fees for EVs. Eleven states have either subsidised or exempted road tax for EVs. To reduce the burden of charging costs for the people, 21 states offer subsidies on the cost of electricity consumed for charging EVs.
The various demand incentives provided by the government are in line with the best practices adopted for EV promotion worldwide. However, these demand-side incentives cannot be a long-term solution to overcome India’s low EV adoption. It can be demonstrated by the fact that the reduction in sales of electric passenger vehicles since the beginning of April was observed after the exclusion of the four-wheeler purchase subsidy from the EMPS. Hence this presents a case for India to move away from the demand-driven incentive space and focus on solutions that encourage the production of cost-efficient vehicles leading to a fall in their prices and greater affordability.
In a bid to produce cost-efficient vehicles, the industry has to achieve a certain level of economies of scale that would culminate solely with increased production of zero emission vehicles (ZEVs) in the market. The government of India, to amplify EV production, has launched two schemes to incentivise production of advanced technology auto components and advanced chemistry cells (for EV battery production). However, given the juncture at which the industry finds itself in respect to the EV30@30 target, a stronger policy is needed to augment production and achieve economies of scale. A ZEV mandate is what the country needs. Such a mandate would compel automakers to produce a specific share of their production as ZEVs, a defiance of which could lead to heavy monetary fines. The mandate, if implemented, would also allow manufacturers to trade credits on the basis of their ZEV production. Any excess credits earned by producing EVs above the mandated limit can be sold at a market-determined price to automakers who are unable to fulfil such a mandate in their production. Hence, besides being a legal obligation, the mandate is a potential source for increasing revenues of automakers. This dual nature of the mandate — as a legislation and incentive — is ideal for the EV industry as it would need automakers to develop production capabilities and innovate to churn out cheaper EVs.
India faces a mountain in its journey to achieving clean mobility targets. Though it has been able to tread along based on an approach fuelled by demand incentives and subsidies, this approach is not equipped to scale the summit ahead. A change of approach fuelled by a production-based mandate would not only give the country the acceleration it needs but also a fair chance of reaching its destination — a cleaner environment made possible through an absolute switch to green mobility in the coming years.
The author is Chair, Institute for Competitiveness. Co-authored with Kartik, researcher, Institute for Competitiveness.
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