Budget 2024: What the government can do to charge up India's EV sector

India's electric vehicle sector achieved a historic milestone in 2023, with sales crossing 1.5 million units with a growth of 50% year-on-year. However, EV penetration remains low due to range concerns, high prices, and inadequate charging infrastructure. Dr. Waman Parkey, Partner and Head of Automotive (Tax) at KPMG in India, explains what India needs to boost in the EV sector.

In recent years, policy initiatives taken by the government, as well as technological development implemented by industry players to make electric vehicles affordable, have made electric mobility seem more like a reality than a powerful dream of the past. In FY2023, India's EV sector achieved a historic milestone by achieving sales of 1.5 million units, representing a year-on-year growth of nearly 50%.

Budget 2024

Despite various incentive schemes like Automotive Production Linked Incentive (PLI), Advanced Chemical Cell Battery PLI, and FAME II introduced by the government, the penetration of electric vehicles is still very low, being only around 1% of total sales in India currently. While the sales growth rate is the highest for passenger cars among various segments due to the small base, only a few buyers show confidence in purchasing electric four-wheelers for private use. This is mainly due to range concerns, high prices of electric vehicles, and the lack of adequate charging infrastructure. So, despite the progress that has been made, electric vehicles are yet to reach the tipping point in their growth now in India.

It is time to realize that electric vehicle growth cannot be supported by government incentives alone. They must be supported by new technologies that reduce vehicle costs, improve vehicle range, and develop newer approaches to charging infrastructure.

The battery management system (BMS), along with battery components, accounts for nearly half the cost of electric vehicles. This has led to a rise in the total cost of ownership of electric vehicles, especially four-wheelers. Therefore, what is most important is developing national capabilities in the field of battery manufacturing. However, the current low demand for electric vehicles would hinder this.

How can we break this Catch-22 situation?

To achieve economies of scale in battery manufacturing, it may be worth exploring the promotion of “ICE + EV” hybrid vehicles, especially in the smaller vehicle segment. Currently, hybrid vehicles do not receive any taxes or other incentives, and these vehicles are mostly available in the mid-to-high price segments. Incentivizing smaller hybrid vehicles could help create that critical mass for battery manufacturing in India, reduce the cost of batteries, and develop newer indigenous technologies. This could take the form of reducing GST rates on hybrid vehicles, as is the case today for electric cars.

To incentivize small hybrid vehicles, these incentives can be allocated to vehicles less than 4 meters in length and with a cylinder capacity of less than 1,000 cc. State policies may provide additional incentives under-investment policies for this segment, the burden of which may be partly or fully shared by the central government under a centrally sponsored scheme. Covering hybrid vehicles under the PLI scheme could also be a way to incentivize such vehicles. Tax incentives could be provided to buyers (individuals and businesses) of hybrid vehicles through accelerated income tax deductions to accelerate the transition to hybrid vehicles.

Local capabilities and newer technologies created for this “small hybrid vehicle segment” could help reduce the total cost of ownership of an electric vehicle in the coming years. It will also save a lot of time needed for charging infrastructure to mature, as hybrid cars do not require charging infrastructure.

A joint strategy to stimulate battery manufacturing, R&D in battery technologies, as well as taxes and other incentives for small hybrid passenger vehicles, could become a game-changer for the Indian automobile industry, Until electric cars reach critical mass.

The human side of the EV ecosystem is often neglected. The EV ecosystem will create new job roles that will be different from ICE's job roles. These roles will be created across the entire EV value chain, from battery manufacturing to EV manufacturing and maintenance and charging infrastructure. Special incentives for skills improvement can be provided to OEMs and other value chain actors, training/education institutes, etc. Higher-income tax rebates to meet retraining expenses of OEMs, centrally sponsored schemes under the Ministry of Heavy Industries, or refinance state government expenditure on retraining, Service industry workforce through its IT organizations and other institutions, increased income tax expense deductions for sponsoring/incurring expenses for specific retraining courses could be potential areas where perks and incentives for prosecutors could be considered.

Electric cars typically have fewer moving parts and therefore have lower maintenance costs. According to one estimate, the automobile sector employs 37 million people in India, and the shift toward electric vehicles means employment disruption for many of these people, especially in the service and maintenance industry. Improving workforce skills and retraining them in both the organized and unorganized sectors will pose a major challenge to EV growth and must be addressed now to achieve smooth EV growth in the future.

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