Electric vehicles pose huge opportunity for Indian mobility market
India has the potential to electrify up to 40% of its vehicle market by 2030, according to new forecasts. With European powers including France and the UK already making moves toward electrification, India’s automotive industry has also begun the shift. The national government is introducing measures to increase electrification looking to improve emissions and fuel costs in the emerging economic power, while making sure Indian manufacturers are well positioned to maintain links with the changing European market.
In April this year, the Indian government announced a major drive towards comprehensive electrification of the vehicle market, with the primary objective of reducing costs of both fuel imports and vehicle maintenance. Currently, the NITI Aayog (the erstwhile Planning Commission) is working with the Ministry of Heavy Industries to develop the policy framework to promote electrification. The comprehensive nature of the move had previously been expressed by Power Minister Piyush Goyal, who stated that, “We are going to introduce electric vehicles in a very big way. We are going to make electric vehicles self-sufficient, like Unnat Jyoti, by Affordable LEDs for All (UJALA). The idea is that by 2030, not a single petrol or diesel car should be sold in the country.”
One government measure that looks likely to incentivise manufacturing of Electric Vehicles (EVs) is the categorical breakdown of the recently introduced Goods and Services Tax (GST). As per GST, the tax levied on small petrol or diesel vehicles is 29% -31%; that on large vehicles is 43%, whereas the tax levied on EVs is just 12%.
On the other hand, technological impediments are expected to prolong the process of electrification. Currently, the batteries of EVs are costly and inefficient, in terms of the distance it is possible to cover on full-charge. In the meantime, automotive companies are turning to hybrid vehicles, both as a technological stepping-stone as well as a familiarisation tactic, en-route to public acceptance of complete electrification.
The present drive for electrification means India could achieve as much as 40% electrification by 2030 in realistic terms, according to McKinsey & Company analysis, a promising figure despite its falling short of the government objective. The firm meanwhile contend that the increasing cost and energy efficiency of EVs have begun to make them the “right fit” for the Indian automotive situation. While hybrid vehicles as a stepping-stone may help with a gradual shift however, the firm emphasises the need to move on to full electrification rapidly. Rajat Dhawan, Senior Partner at the Indian wing of the firm, said, “Frankly, it (hybrid) is a transitory technology till the range and cost deficiencies in batteries remain. You are putting both internal combustion engine (ICE) and electric components. It is a heavier technology,” said Dhawan in an interview to the Economic Times in India.
While hybrid technology has gained traction in the US, it remains unlikely to gather the same momentum in India primarily due to fiscal disincentives. As per the GST, hybrid vehicles can be taxed as much as 53%, which is higher than any other category. According to Dhawan, “In the new GST regime, hybrids are taxed much higher than the battery electric vehicles — there was a sin tax associated with it because some of the manufacturers started introducing nominal hybrids. I think that it is either battery electric vehicles all the way or we continue with ICE engines/low cost power trains here. Those are two scenarios we are looking at.”
Nevertheless, Dhawan maintains that India stands to gain substantially from the transition to EVs, as per McKinsey’s broader perspective on EVs in the global market. In a 2016 report, the consulting firm provided analysis on how EVs were the best way forward for congested cities, such as Delhi and Mumbai, primarily due to the fact that the diverse and unruly traffic makes other mobility options such as self-driving cars infeasible. A transition to EVs would benefit the air-quality as well as the traffic congestion in such cities. Such considerations are increasingly being reflected in global market trends as well, with a recent study from advisory group AlixPartners reporting that the EV industry has grown by nearly 200% over the last two years, and is forecast to grow steadily, over the next two decades.
Earlier in the year, Indian Minister of State for Planning Rao Inderjit Singh announced that McKinsey would be among a number of consultancies hired by the NITI Aayog commission. McKinsey will be required to help transform health and education in three states. They were joined by rival consulting industry players Boston Consulting Group (BCG), EY and IPE Global, in order to assist with time-bound projects across multiple sectors.
