Private cars must be part of EV policy push

Deepak Rajagopal/Amol Phadke When it comes to electric vehicles (EVs), we face two choices. One is to view them as still costly for India, and so we must wait and watch while our cities choke and we cede the competitive edge, as we did with electronics, which is India’s second-largest and fastest growing category of imports. The alternative is to see EVs as an opportunity to pursue a new green industrial policy that can reinvigorate the auto sector, reduce dependence on imports and the cost of mobility, and above all, make our cities more liveable.

The good news is that both the ₹10,000-crore Faster Adoption and Manufacturing of Electric vehicles Phase-II (FAME-II) scheme, adopted last year, as well as the minimal GST on EVs are aligned with the latter view. The FAME-II was also spot on in prioritising EVs for public buses and two- and three-wheelers ahead of private cars, as the former offer better socio-economic returns on public investment.

Having said that, one cannot ignore private cars, for their stock is set to grow and they contribute significantly greater person-kilometre pollution relative to buses and two- and three-wheelers. Recognising the burden of additional subsidies, the rest of the discussion lays out the case for a strong binding mandate on automakers requiring that zero-emission vehicles (ZEVs) — including hydrogen fuel cell vehicles (FCV) — comprise, say, at least 20 per cent of the annual car sales well before the end of the decade.

Note that global trends increasingly suggest that EVs have a clear and widening economic and environmental edge over FCVs in the light duty vehicle segment. Such an obligation is similar to the Renewable Purchase Obligation (RPO), which requires electricity distribution companies to procure a specified share of their electricity through solar and other renewable sources each year, and is playing a critical role in India being a leader in low-cost renewable energy deployment.

Manufacturing investment

A ZEV mandate can potentially be the pull for large investments in domestic battery manufacturing. For maximising energy security, trade balance and employment benefits, domestic production of battery cells seems essential. A study by the US trade commission suggests less than 20 per cent of the final battery pack cost is associated with pack assembly; the rest accrues upstream in raw materials and cell manufacturing. Since India lacks a competitive edge in battery exports, the only alternative is to use domestic demand as the pull to attract massive investments in cell manufacturing.

Although FAME-II is driving some battery demand, the lack of a binding mandate creates significant uncertainty about the size and timing of this demand, thus hampering the scale of investments required to make India a future global hub for battery manufacturing. Additionally, such a mandate would scale up private sector investments by charging-infrastructure equipment manufacturers, installers, and charging service providers, which will spur further demand for EVs regardless of subsidies.

Of course, domestically-made cells will make EVs costlier, which cannot be overlooked. In this regard, the hike in import duty on batteries from 5 per cent to 10 per cent, announced in the latest Budget, is welcome. Some additional subsidies could be provided by States interested in attracting battery manufacturing.

Lowering costs

The existing generous subsidies suggest that the burden of EVs on the auto sector will be minimal. EVs enjoy three major forms of subsidies: 5 per cent GST as opposed to 28 per cent on petroleum vehicles; income tax deduction up to ₹1.5 lakh per EV; a FAME- II incentive of ₹10,000 per kilowatt-hour (kWh) of battery, although this is capped at the first 35,000 commercial vehicles. With all three subsidies included, compared to a petrol/diesel vehicle with ex-showroom price of ₹8 lakh (GST included), an EV with 200-km range (39 kWh battery) is actually ₹2.3 lakh cheaper (for commercial vehicles). Without the FAME-II incentive of ₹10,000 per kWh, the latter is ₹1.2 lakh costlier.

And how can one forget that the operating and maintenance costs are a quarter and a half for an EV, respectively, relative to that for petrol and diesel cars, which at a daily average use of 40 km implies substantial savings over the useful life of the vehicle.

Overall, the private economic case appears quite strong. However, international experience in the auto sector and experience in the Indian power sector of renewable growth suggests that a mandate is still needed to kick-start a virtuous cycle of economies of scale, low costs, increased model availability and public acceptance.

But faced with a mandate in order to push through EVs, OEMs could shift the additional cost of EVs to petrol/diesel vehicles. For reference, if an OEM wishes to make the upfront cost of a petrol/diesel and EV equivalent, it would need to spread the extra ₹1 lakh cost of the EV across the petrol/diesel cars. So, a 10 per cent ZEV mandate could raise the cost of a petrol/diesel vehicle by up to ₹10,000.

Additional policy safeguards could ensure that this burden falls minimally on the cheaper cars (say cars below ₹5-6 Lakhs) and principally on the expensive ones (say over ₹8-9 lakh). Alternatively, State governments could step in to fill the gap. But overall, dangling the stick of mandate in lieu of the carrot of subsidies to OEMs seems a fair bargain for taxpayers.

Driving adoption

Mandates are driving EV adoption worldwide. The California ZEV mandate sets a target of five million ZEVs to be sold within the state by 2030, as well as the installation of 2,50,000 EV charging stations by 2025. China’s 13th Five-Year Plan identifies new energy vehicles as one of the 10 priority sectors for development, with the goal that EVs comprise 25 per cent of new vehicle sales from 2025.

In summary, even if EVs have much going for them, given FAME-II and the low GST, there are some key missing elements in the Indian EV policy landscape, especially when it comes to private cars. On the supply side, a binding ZEV mandate on auto OEMs would go a long way in sending a strong signal to attract cell manufacturing and also drive OEMs to take this seriously. Further, it will kick-start a virtuous cycle of economies of scale and low costs.

On the demand side, concentrating on a select few major cities and inter-state highways as models for high EV and charging infrastructure penetration would go a long way in building consumer confidence, which can put EVs on the path to a self-sustaining future.

Even as the focus here has been on cars, the same rationale also holds for mandates on other vehicle segments. In fact, one aggregate mandate with trading of obligations within and across vehicle segments is something to ponder seriously.

Rajagopal is associate professor at the University of California, Los Angeles. Phadke is a scientist at the Lawrence Berkeley National Lab, US

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