India's Transition to Electric Mobility Needs a Long-term Roadmap
An exclusive focus on PLI may lead to oligopolies and hurt innovation
India's ambitious commitment to achieving net-zero emissions and reducing its dependence on oil imports hinges on a successful transition to electric mobility. India has thus set a target of 30% penetration of electric vehicles by 2030. Global examples show that no country has made a significant transition to electric mobility without robust government support in the form of subsidies and other incentives. China, the world's largest electric vehicle market, owes its success to generous government subsidies for EV purchases and heavy investment in charging infrastructure. Similarly, the United States and Germany have achieved advanced electric mobility through a combination of tax credits, rebates, and supportive policies, underscoring the pivotal role of government support in driving this transition. For India, government support is imperative in the context of its diverse economic demographics and the focus on the price-sensitive 2-wheeler category.
The question then is what should be the nature of this support? India's electric mobility sector has witnessed growth driven by consumer incentives, notably the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme. The scheme successfully reduced upfront costs, encouraging greater consumer adoption. However, recent subsidy reductions led to sudden price increases and some decline in sales. Furthermore, the fate of FAME post its current term remains uncertain. There is some speculation that the Government would prefer to move subsidies upstream to manufacturing through its production-linked incentive (PLI) schemes.
There is no question that India’s transition to electric mobility must be on the back of progressively localized manufacturing; however, the move to replace consumer subsidies under FAME with manufacturer-focused reimbursements under PLI risks creating monopolies and stifling innovation. The PLI scheme with its high revenue and investment eligibility criteria is explicitly directed towards large players. On the other hand, FAME’s focus on consumers nurtures competition, permitting all players to vie for market share irrespective of their size.
In the current technological landscape, the cost of producing electric vehicles is significantly higher than traditional fuel vehicles. Creating a broader market, beyond the initial wave of early adopters, requires subsidizing EV upfront costs. This can either be borne by Original Equipment Manufacturers (OEMs) as losses or facilitated by government demand incentives. Presently, the Indian market adopts both approaches. However, it is evident that the Government cannot rely on the ability of some OEMs to sustain losses for extended periods as it could give rise to oligopolies—a practice incongruent with the government's own stance on allegedly predatory practices of Big Tech.
However, the PLI scheme may end up doing exactly this: by exclusively providing large manufacturers, already more likely to be able to withstand sustained losses, with subsidies ranging from 13% to 18% of their sales revenue. This is likely to skew the market further in favour of larger players and marginalise smaller, yet innovative, market participants.
The EV sector in India has made impressive strides buoyed by government support. Yet it remains nascent with evolving technology, supply chains and ecosystem. To unlock its full potential, the sector requires policy certainty to attract investments to augment domestic manufacturing capabilities, as well as an equitable subsidy framework to foster competition and innovation. While it's true that subsidies can't be perpetual, a well-structured roadmap can strike a balance and allow all stakeholders to develop their market strategies and plan their investments accordingly.
Widespread consumer adoption will be a function of technology, ecosystem and pricing. Technologically, pivotal aspects include the advancement of battery technology—specifically battery range, charging speed, and battery life—until they align more closely with those of conventional fuel vehicles. Additionally, the availability and swiftness of the charging network will serve as vital determinants in creating an ecosystem that can assuage consumer concerns about vehicle range. The pricing of these elements will vary based on the prevailing technological state, market dynamics, and diverse manufacturing strategies adopted by different Original Equipment Manufacturers (OEMs). Consequently, one manufacturer might opt to reduce variable costs through substantial upfront capital investments, necessitating the capture of significant market share to yield returns but also potentially exposing them to technology-related risks. Alternatively, another manufacturer might focus on in-house design while outsourcing manufacturing through the local supply chain ecosystem. These divergent strategies will yield varying outcomes and contribute to distinct national capabilities.
A strategic approach to policy development could thus involve plotting the projected trajectory of technology, ecosystem development, and associated pricing over the 7-year timeline until 2030. By pinpointing specific junctures on this trajectory, the government can chart the manner and duration of subsidies and navigate the associated trade-offs.
It is not hyperbole to say that the transition to EVs will have a transformative impact on India. This transition will transform not just mobility but will also impact energy, labour, environment, and geopolitics. Successfully navigating this transition will require a partnership between the government and industry. The way to achieve this partnership is through a stable policy regime which will foster innovation and drive competition. The convergence of policy foresight and innovation by OEMs can catapult India into global leadership for manufacture of light electric vehicles.
Note: I advise an electric mobility company; however, these views are strictly personal.
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