New EV policy on the right track

The new e-vehicle policy announced by the government heralds a significant strategic shift in India’s EV landscape, underlined by its robust investment framework and stringent manufacturing timelines. Such a policy thrust is needed for tapping the huge potential of India’s EV industry, estimated at $2-3 billion in 2023 and likely to catapult to around $100 billion by 2030. Accordingly, the policy mandates a minimum investment threshold of ₹4,150 crore with no upper limit on investment and fosters a conducive environment for both domestic and foreign players.

The new policy framework is beneficial to prominent global EV manufacturers such as Tesla and Vinfast too, which are looking to penetrate the Indian market. The foremost benefit lies in the substantial reduction of import duties, notably from 70 per cent to 15 per cent on EVs with a minimum price cap of $35,000. This significant reduction in import tariffs substantially lowers the trade barriers to entry, rendering the Indian market more accessible and financially viable.

The policy’s stipulation of a phased approach to market entry will prove to be cost-effective for new investors and prospective entrants. The policy incentivises investment across the entire EV ecosystem, including battery manufacturing and charging infrastructure, creating a favourable environment for ancillary industries to flourish and, thereby, foster competition and technological advancements. The unique feature of the policy is that it protects domestic players by fixing a price threshold of ($35,000+), thus shielding manufacturers like the Tatas and Mahindras from immediate competition and giving them time to scale up their offerings.

Strategic shift

The policy aims to convert obstacles into opportunities. Accordingly, it mandates investment of $500 million in manufacturing facilities and commencement of commercial production of e-vehicles within three years. It also seeks progressive domestic value addition (DVA) and correspondingly stipulates a localisation level of 25 per cent by the third year of operations, further escalating to 50 per cent by the fifth year.

This emphasis on enhancing DVA aligns with the broader vision of augmenting indigenous manufacturing capacities, capabilities and competence thus substituting imports, enhancing exports and, most importantly, fostering self-reliance in the EV ecosystem. Interesting, the policy protects small domestic players.

It incentivises manufacturers to set-up local manufacturing units by offering a customs duty waiver of 15 per cent on vehicles with a minimum CIF value of $35,000 for a period of five years, contingent upon meeting the manufacturing facility in India within a stipulated timeframe. Accordingly, to ensure accountability and adherence to investment commitments, new investors will be required to furnish a bank guarantee equivalent to customs duty foregone. This mechanism provides assurance that the investment pledges must translate into tangible outcomes, with the bank guarantee subject to invocation in case of non-compliance with DVA and investment criteria outlined in the policy guidelines. Therefore, the new e-vehicle policy represents a strategic shift, leveraging targeted incentives, stringent timelines, and accountability mechanisms to catalyse the growth of EV industry in India.

Policy rationale

The economic rationale of the new policy draws on elements of both classical and modern economic theories. Considering key features of the policy such as lower tax rates, guaranteed investment thresholds and focus on domestic manufacturing (Make-in-India), it has leveraged a heterodox economic model. Accordingly, it interweaves supply-side economics, theory of comparative advantage and infant industry arguments as propagated in India’s industrial planning in recent years.

At its core, the policy leans towards supply-side economics and, accordingly, emphasises stimulating economic growth by encouraging production (supply) rather than solely focusing on increasing demand. Further, the new e-vehicle policy incentivises the creation of a domestic EV manufacturing industry.

This aligns with the principle of comparative advantage, where countries specialise in producing goods that they can create more efficiently i.e., low-priced e-vehicle by domestic players. Lastly, the temporary tax-breaks can be seen as an application of the infant industry argument. This theory suggests that new industries in developing countries might need temporary protection (like lower taxes) to compete with established players in other countries. The tax-break allows the domestic EV industry to mature and become competitive in the global market.

The presence of global players can lead to knowledge transfer and collaborations with domestic companies. This will foster innovation in the Indian EV industry, leading to more advanced and competitive domestic products. In the process, India can build a robust domestic EV ecosystem by promoting both large and small industries, especially MSME component manufactures, service providers, and research institutions.

The policy also factors in the impact of loss of revenue with reduction in duties. It expects the reduced tax revenue from imported EVs to be offset by increased tax revenue generated from domestic production, job creation, and economic growth, albeit in the long run. Moreover, it offers a choice of affordable and quality e-vehicles to Indian customers.

By attracting investments, promoting domestic manufacturing, and fostering technological advancements, the policy seeks to position India as a major player in the global EV market.

Singh is Professor and Head, and Chaudhary is Research scholar, IIFT, New Delhi. Views are personal

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