India’s EV Manufacturing Scheme: Concerns & Way Ahead

Syllabus: GS3/Science & Technology

Context

• Recently, the Union Government recently said that it would start accepting applications from global electric car manufacturers for setting up factories in India.

About India’s Automotive Market

• It is currently valued at ₹12.5 lakh crore ($150 billion), and is projected to double by 2030.
• Passenger car sales are expected to grow to 9–11% of all vehicle sales by then, up from just 2.5% today, as electric mobility becomes central to climate action.
• The Union Ministry of Heavy Industries announced a Scheme to Promote Manufacturing of Electric Passenger Cars in India (SPMEPCI) to capitalize on this opportunity in March, 2024.

Core Proposition of SPMEPCI

• SPMEPCI encourages global EV manufacturers to set up factories in India, offering them a limited window to import high-value electric cars (worth $35,000) at a reduced customs duty of 15% — far lower than the usual 110%.
• It is tightly capped at 8,000 units per year and subject to two conditions:
  • Revenue foregone through this incentive must not exceed the manufacturer’s capital investment.
  • Companies need to invest at least ₹4,150 crore, with domestic value addition of 25% by year three and 50% by year five.

Significances of EVs

• Tackling Climate Change: The transport sector contributes ~15% of global CO₂ emissions.
  • Oil dependency (petrol and diesel) is a major driver of this pollution.
  • Electric vehicles (EVs) powered by renewable energy present a cleaner alternative.
• Reducing Local Air Pollution: Urban areas suffer from toxic air pollution, primarily from fossil-fuel vehicles.
  • EVs can significantly cut harmful emissions in cities. It has direct health and quality-of-life benefits.
• Saving Foreign Exchange: Countries like India spend vast sums on oil imports.
  • EV adoption can reduce this burden, improving national economic resilience.

Key Concerns & Challenges

• Limited Incentives for Global Investors: SPMEPCI offers no tax breaks, capital grants, or land/energy subsidies, unlike EV policies in countries like Thailand and Mexico.
• Stringent Localization Requirements: While this encourages local manufacturing, many industry players worry that India’s existing supply chain isn’t mature enough to meet these demands, leading to production delays and increased costs.
• High Entry Barriers: India’s scheme mandates for a minimum investment and strict domestic value addition targets.
  • These thresholds may deter smaller or newer players from entering the Indian market.
• Revenue-Based Penalties: Automakers need to meet revenue targets of ₹5,000 crore in four years and ₹7,500 crore in five years. Falling short could trigger penalties of up to 3% of the revenue gap, recovered from bank guarantees.
  • It adds financial risk and uncertainty for participants.
• Exclusion of Chinese Manufacturers: The scheme explicitly bars Chinese EV makers, including BYD, the world’s largest electric car manufacturer.
  • It limits competition and may reduce the diversity of technology and pricing options available to Indian consumers.
• Limited Interest from Global Majors: While brands like Mercedes-Benz, Skoda, and Volkswagen have shown interest, Tesla has opted out, preferring to pay full import duties instead of investing in domestic production.

Government Initiatives and Policies

• FAME India Scheme (Phase II): It aims to support the electrification of public and shared transportation.
• E-Vehicle Policy: It encourages global EV manufacturers to invest in India, boosting domestic production and reducing reliance on imports.
• PM E-DRIVE: It has played a crucial role in supporting commercial EV adoption, particularly in the three-wheeler segment.
• Charging Infrastructure Expansion: As of mid-2024, India had over 16,000 public charging stations, significantly improving accessibility for EV users.

Way Ahead

• There is a need to focus on automation and AI in manufacturing to integrate modular EV architectures to streamline production and cater to diverse market segments.
• Manufacturers need to focus on recycling materials, reducing waste, and optimizing resource use to lower environmental impact (sustainability & circular economy).
  • Bio-based die-casting lubricants are emerging as eco-friendly alternatives for precision EV parts.
• Introduce Direct Incentives such as tax exemptions, infrastructure support, or lower-cost financing.
• Revise Investment Thresholds to encourage mid-sized global manufacturers.
• Expand Import Allowances beyond 8,000 units per year to give investors a better runway.
• Strengthen Supply Chain Development to help meet domestic value addition targets sustainably.

Source: BL