Electric mobility

EV import policy can face execution challenges

In a major new policy direction for the Indian automobile sector, the government has announced that import duties on electric vehicles (EVs) will be slashed as long as the EV manufacturer makes certain commitments to the government about producing in India. In particular, for models of electric cars with a combined cost, insurance, and freight price in India of $35,000 or above, the tariffs have been slashed from 100 per cent to 15 per cent. A similar reduction has been made for cheaper vehicles attracting a tariff of 70 per cent. In return, the companies have to promise to set up a manufacturing plant in India alongside an investment of $500 million (Rs 4,150 crore) within three years. Further, the localisation of components is required, with at least 50 per cent domestic value addition by the fifth year of operation.

The government certainly needs help in achieving an ambitious target of a 30 per cent share for EVs in cars sold by 2030. Several EV makers, including Tesla, can technically benefit from these rules. It is possible that even China’s BYD, which dominates the electric car market, could enter the Indian market, though companies from countries sharing land borders with India need additional government permission for investments. In this context, it should be noted that Tesla’s “Gigafactory” approach, which incorporates a large part of the components required for its cars into a single factory instead of requiring the presence of a large ecosystem of component producers, is set up more towards such single-deal agreements than others. However, creating an EV ecosystem within the country would require not just a single manufacturer to be introduced but an entire set of supporting companies, each with its own supply chain, to be moved. For this it is required not that the tariffs on the final product be reduced, but that those on intermediate goods and inputs be rationalised so that global value chains can be built.

There are additional questions to be asked about the promissory note that investors will provide the government in return for this concession on tariffs. Tracking the cooperation of a company that has received a reduction in duties will be extraordinarily difficult. Delays in the investment and localisation requirements will constantly be demanded by the companies that have been granted concessions. It is not clear how the government will deal with firms that ultimately fail to fulfil investment targets. If the promised investment does not materialise, or a new factory is insufficiently localised within five years, will the duty concessions be clawed back? From the consumer or from the company? If a similar approach is adopted in other sectors, trade policy will become enormously more complicated.

Trade policy requires overall low and stable tariffs, particularly in sectors that are relevant for entering global value chains. Such concession-based mechanisms are always difficult to track and make policies less consistent. To be sure, India needs large investments in a variety of sectors and this sometimes pushes policymakers to adopt innovative measures. However, as has been the evidence, simple and stable policies tend to attract more businesses and investment.