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| Updated on July 28, 2021

Lowering import duties on cars may help Tesla but will hurt the fledgling domestic EV industry

True to style, Tesla founder Elon Mask has set the cat amongst the pigeons, targeting India for its high import duties on cars (100 per cent on cars priced above $40,000 and 60 per cent for those below that). Tesla would like to test the market with imported cars before deciding whether to set up a plant here; the high import duty is an impediment. But the problem is that duties cannot be reduced for just one player, it has to be for the entire category of cars and that’s where the complications start. Domestic players have invested and are investing in electric vehicle (EV) technology and manufacturing plants in a big way, and a lowering of import barriers will not help their cause. While Tesla may not be an immediate threat given that its products address the premium end of the market, the lower barriers will certainly help others who operate in the affordable, mass market category. This includes not just the likes of Hyundai — whose India MD SS Kim voiced support to Musk’s demand — but also a host of EV manfacturers from China who are waiting in the wings. The ‘infant industry’ argument holds here; India’s electric vehicles industry needs protection at this stage to be able to serve the needs of a vast potential market, which will inevitably shift from regular cars and two-wheelers to electric ones in the next few years.

The share of EVs is expected to rise sharply from current levels of 2 per cent on the back of government incentives for EV adoption and, of course, rising fuel prices. There’s little doubt that India should develop its own EV industry. The situation now is similar to what the car industry faced in the early 1990s when a wave of multinational carmakers, attracted by the opening up of the economy, descended on India with their screw-driver assembly projects. The then government raised import duties on knocked-down assembly kits and pushed the multinationals to set up integrated manufacturing plants in India by offering them attractive incentives. The automotive industry is now reaping the rewards of that policy which was framed against much opposition. Indeed, India would not be boasting of a thriving auto industry now, complete with the components ecosystem, if it had not turned “protectionist” then. Cut to 2021 and the country is faced with a similar situation on EVs. The additional factor now is that the domestic auto industry is mature and capable of investing and servicing the expected demand.

That said, India should encourage leading players to invest by providing world-class infrastructure and logistics, while ensuring that they procure locally. It is noteworthy that some of India’s EV component makers are suppliers to global majors. As for Tesla, if the company sees promise in the Indian market, it would drive in for sure. Presently the addressable market for Tesla in India is not high enough to justify investment in a plant. And that answers the question of why Elon Musk wants import duties slashed.

Published on July 28, 2021

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