EV Manufacturing Scheme in India

Context

The Government of India launched the Scheme to Promote Manufacturing of Electric Passenger Cars in India (SPMEPCI) on March 15, 2024, aiming to establish India as a global hub for electric vehicle (EV) manufacturing. This initiative aligns with national goals such as achieving net zero emissions by 2070, fostering sustainable mobility, boosting economic growth, and generating employment. The scheme targets attracting global and domestic investments in electric passenger car production by offering certain incentives, primarily through reduced customs duties on imported fully built electric vehicles (CBUs) with a minimum value of USD 35,000, for a period of five years.

Key Features of the Scheme

• Minimum Investment Requirement: Applicants must commit to investing at least ₹4,150 crore (approximately USD 500 million) in EV manufacturing infrastructure within three years.
• Customs Duty Concession: Approved manufacturers can import up to 8,000 electric passenger cars annually at a reduced customs duty of 15%, compared to the standard 110%, for five years.
• Domestic Value Addition (DVA) Targets: Companies must achieve 25% local value addition by the third year and 50% by the fifth year.
• Turnover Milestones: Manufacturers are required to reach annual turnover targets of ₹2,500 crore by year two, ₹5,000 crore by year four, and ₹7,500 crore by year five.
• Caps on Benefits: The total customs duty concession is capped at ₹6,484 crore or the actual investment amount, whichever is lower.

Caveats and Challenges of the Scheme

Despite its ambitious goals, the scheme has several caveats that raise concerns about its attractiveness and effectiveness:

• High Investment Threshold: The minimum investment requirement of ₹4,150 crore is substantial and may deter many potential investors, especially smaller or mid-sized manufacturers. This high entry barrier limits the pool of eligible applicants, potentially slowing down the pace of EV manufacturing expansion in India.
• Limited Incentives Beyond Duty Concessions: Unlike other countries with competitive EV policies, India’s scheme lacks direct financial grants, tax reductions, affordable land allocation, or energy subsidies. The only incentive is a reduced customs duty on a limited number of imported CBUs, which may not be sufficient to attract large-scale investments or offset high manufacturing costs in India.
• Restrictive Import Caps and Duty Concessions: The annual cap of 8,000 imported vehicles at reduced duty limits manufacturers’ flexibility. Additionally, the customs duty concession is capped by the amount of capital investment, which could restrict the benefits for companies planning larger scale operations. This contrasts with more liberal policies in countries like Thailand and Mexico, which offer more comprehensive incentives to global EV manufacturers.
• Stringent Domestic Value Addition Requirements: The requirement to achieve 25% domestic value addition by year three and 50% by year five is ambitious but challenging given the current state of India’s EV component manufacturing ecosystem. This could delay the realization of full-scale domestic production and increase dependency on imports of key components, impacting cost competitiveness.
• Exclusion of Key Players: Notably, Tesla, a major global EV manufacturer, has opted out of the scheme citing concerns over high import duties and investment conditions. Tesla’s absence is a significant setback given its technological leadership and potential to catalyze the Indian EV market.

Comparative Perspective

India’s EV manufacturing scheme, while forward-looking, falls short when compared with similar initiatives in other developing countries. Nations like Thailand and Mexico offer more attractive packages including tax incentives, subsidies, and infrastructure support, which have successfully drawn major global EV manufacturers. India’s relatively restrictive and high-threshold scheme may struggle to compete on the global stage for EV investments.

Way Forward: Recommendations for Enhancing the Scheme

To make the scheme more appealing and effective, the following measures could be considered:

• Introduce Direct Financial Incentives: Tax breaks, subsidies, and affordable land or energy provisions could reduce operational costs and attract more investors.
• Lower Investment Thresholds: Allowing participation from smaller manufacturers could diversify and accelerate EV production.
• Relax Import Caps: Increasing or removing the cap on duty-reduced imports would provide manufacturers greater flexibility.
• Strengthen Supply Chain Development: Support for domestic component manufacturing through linked incentives can help meet DVA targets more realistically.
• Engage with Global Leaders: Tailoring policies to address concerns of major players like Tesla could bring cutting-edge technology and investment to India.

Conclusion

The Scheme to Promote Manufacturing of Electric Passenger Cars in India is a significant step towards India’s sustainable mobility and climate goals. However, its current design with high investment requirements, limited incentives, and restrictive conditions poses challenges in attracting substantial global EV manufacturing investments. Addressing these caveats through more comprehensive and flexible policy measures will be crucial for India to emerge as a competitive global EV manufacturing hub and realize its green and economic ambitions.

 Source: BL

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