In pursuit of placing India on a trajectory towards a $5 trillion economy, Finance Minister Nirmala Sitharaman announced a development-oriented Union Budget on July 6, 2019. Also, with an aim to promote sustainable development, and accelerate the electric mobility market in the country in this endeavor, measures such as income tax deduction of Rs. 1.5 lakh on interest paid on electric vehicle purchase loans, reduction in GST rates on electric vehicles, and a commitment of Rs. 10000 crore towards FAME-II, were announced in the budget.
Electric vehicles look to mitigate the effects of automobile emissions in Indian cities, especially given the fact that seven out of the ten most polluted cities are in India, thereby enhancing environmental sustainability. EVs further stimulate the economy by encouraging local manufacturing, adoption of new technology advancements, and by reducing dependency, and ergo the bill on imports of petroleum products. Besides economic benefits, import substitution is also important from the perspective of energy security.
Initiatives so far, much like the budget announcement, have been supportive of demand-side interventions, comprising of fiscal, as well as non-fiscal incentives. Reportedly, the implications of the Budget announcement is an income-tax savings of up to INR 36,000 on an EV loan of INR 10 lakhs for a five-year tenure at the prevailing interest rate of 12%. However, considering the perspective of the banking industry, challenges may arise in pledging EVs against loans, as there is a limited secondary market for its resale. Additionally, proposed GST reduction from 12% to 5% can also ease affordability to own an electric vehicle. There is however still a gap in the price premium for electric vehicles which can gradually come down depending on technology advancement and localization as well as economies of scale in manufacturing of electric vehicles and its components. Further, an increase in cess on fuel as announced in the budget may provide a push to EV adoption. Perhaps this may also be directed towards making incentives for electric vehicles budget neutral, by offsetting these incentives through ICE vehicle disincentives.
Supply-side interventions, on the other hand, have not fared significantly in the past. As an ambit of the Make in India initiative, the rationalization of customs duty for vehicles, battery packs, and cells were established but hardly yielded desired outcomes. Hopefully, the Budget’s incentive schemes for manufacturing plants of solar photovoltaic cells, lithium storage batteries, and solar electric charging infrastructure shall help tie up loose ends that have pervaded the supply and enabler environment as well.
Therefore, strong complementary initiatives serve as a push for EV adoption. This may be achieved by holistically augmenting the EV ecosystem, comprising of the demand, supply, and enabler environment, which can certainly come about through a convergence of government schemes. Hence, as welcome as the Budget announcements are, the need of the hour is to focus on a balanced ecosystem approach that facilitates a break-even of the EV with the ICE vehicle, with regard to equalization in prices. Balanced approaches have proven successful in countries such as Norway and China, which have some of the highest EV penetration rates in the world.
(The author is Pranavant, Partner at Deloitte India)
News Source: Financial Express