On March 15, the Union Government of India approved a new electric vehicle (EV) policy to attract investments from global electric car companies and promote local manufacturing in the subcontinent. The new EV policy, which is in line with the Government's flagship Make-in-India initiative, comes at a time when Tesla is officially looking to enter the Indian passenger car market and Vietnam's VinFast has already commenced constructing its EV plant in the southern state of Tamil Nadu, with a committed investment of $2 billion.

In its new EV policy, the Government of India has reduced the customs duty on importing electric cars as completely knocked down (CKD) kits from 70% to a mere 15%, subject to cars with a minimum cost, insurance and freight (CIF) value of $35,000 and above for a period of five years.

The duty cut is, however, applicable for car companies committing to invest a minimum of $500 million and set up an EV manufacturing plant in India within 3 years from the issuance of the approval letter by the Government's Ministry of Heavy Industries. Additionally, the policy also mandates the qualifying automaker to achieve a localization rate of 25% domestic value addition (DVA) by the third year of starting production operations and 50% DVA within five years.

A much-needed boost

The new policy allows the qualifying carmakers to import a maximum of 40,000 EVs at the rate of 8,000 units per year, given the investment in India is $800 million or more. However, it does permit the carryover of unutilized annual quotas to the next year.

The new EV policy is aligned with India's long-term goals of reducing its oil imports, lowering the trade deficit and trimming emissions intensity by 45% by 2030. The move is expected to open the floodgates to the world's third-largest auto market for global carmakers. It is also timely. EV sales growth in the market is slowing down and EVs only accounted for 2% of total car sales in 2023, some way short of the government's target of 30% by 2030.

Negotiations with Tesla

The new EV policy is also widely seen as the result of months of hard negotiations between the Indian government and Tesla. Notably, the US EV maker has been delaying its India entry for at least five years due to duties that were as high as 100% on imported completely built units (CBUs) with a price tag of $40,000 or more.

However, talks moved forward when India's Prime Minister Narendra Modi met Tesla CEO Elon Musk during his state visit to the US in June 2023. "He's pushing us to make significant investments in India, which is something we intend to do. We are just trying to figure out the right timing. I am confident that Tesla will be in India," Musk told the media immediately after meeting with Prime Minister Modi.

The Indian government also offers incentives under its production linked incentive or PLI scheme to support the local production of batteries. The National Program on Advanced Chemistry Cell (ACC) Battery Storage, first launched in May 2021, was allocated a budget of 181 billion rupees (equivalent to about $2.5 billion at May 2021's exchange rate).

"We think the push for localization would draw interest from the domestic as well as global battery makers to invest in cell manufacturing facilities. While domestic cell manufacturers lack the expertise and experience in this domain, they mostly collaborate with overseas companies for technology assistance. The unavailability of key raw materials and the supply chain challenges would be the key reasons for global battery makers to not move ahead with setting up facilities in India just yet. However, with the increasing need for batteries in India to fulfill the localization target, more investments in cell manufacturing are expected," said Deya Das, Senior Research Analyst (Battery), at S&P Global Mobility.

Author: Amit Panday, Senior Research Analyst, Supply Chain & Technology, S&P Global Mobility

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