Why hybrids may fail to take off in India's evolving automobile market

A new report says EVs and CNG vehicles will outpace hybrids by far

The global automotive industry is witnessing a shift towards hybrid electric vehicles, which has led to expectations that a similar trend could play out in India as well. It might not.

 

Analysts believe electric vehicles (EVs) will be 18 per cent of the market in India by 2029-30 (FY30), up from a mere 2.4 per cent in FY24, and vehicles running on compressed natural gas, or CNG, will have doubled their share of the market to 30 per cent by that time. Hybrids, on the other hand, will be only 4.1 per cent of the market, having grown not all that much from 1.8 per cent in FY24. 

Analysts Nishit Jalan, A K Gaur, and Nikith Reddy argue in an Axis Capital report that the total cost of ownership (TCO) of hybrids works against them. Fitted with a dual powertrain, hybrids in India are 20 to 28 per cent more expensive than comparable ICE (internal combustion engine) models, although globally their price is only 6 to 10 per cent higher. Incentives worth Rs 200,000 will be required to make hybrids reach parity versus ICE and EVs, although they will still be less attractive than CNG vehicles. 

 

TCO breakeven of hybrids versus ICE vehicles in the Indian context, according to the Axis Capital analysis, is eight to nine years at current prices, considering hybrids are 15 to 20 per cent more fuel efficient than their ICE counterparts. For users who drive more on highways, the TCO breakeven may take even longer, because on highways the fuel efficiency gap between the two barrows. 

“Assuming a 70:30 city-highway vehicle running ratio (and with fuel-efficiency benefits as highlighted above in both conditions), TCO breakeven would happen at 115,000 km, or after 12 years,” the report says. 

According to the calculations, hybrids would require fixed incentives of Rs 200,000 per vehicle (on ex-showroom price, implying a reduction of on-road prices by Rs 230,000 to Rs 240,000) – this would help reduce TCO breakeven to 30,000 km, or after three years (assuming 100 per cent running in city conditions). Assuming a 70:30 city-highway vehicle running ratio, TCO breakeven would happen at 40,000 km, or after four years. 

Taxing issue  

EVs in India attract 5 per cent Goods and Services Tax (GST), but hybrids  are charged 28 per cent. The divide within the auto industry recently came to the fore after a July 5 order of the Uttar Pradesh government to waive registration tax of 8 to 10 per cent for strong hybrid vehicles.  

Some industry insiders point out that the primary ideological challenge in incentivising hybrids means incentivising fuel efficient ICE (as the source of energy is still petrol) compared to CNG vehicles, which give fuel savings and emissions reductions of 15 to 20 per cent. 

 

The country’s largest carmaker, Maruti Suzuki India, is rooting for a policy framework to promote all green technologies, including strong hybrids, to replace petrol and diesel vehicles and reduce carbon dioxide emissions, its Chairman R C Bhargava says in the company’s annual report. 

However, Indian auto majors are divided on the best path ahead as the country aims to become carbon neutral by 2070. Maruti and Toyota are batting for tax cuts on hybrids, while Tata Motors and Mahindra and Mahindra (M&M) have opposed such cuts, insisting that only a full-throttle EV push can truly decarbonise India’s roads. 

In Maruti’s annual report, Bhargava says: “Some believe that your company has been slow to manufacture electric vehicles. We decided to adopt a more diversified approach to meeting national objectives and did not want to put all our eggs in one basket. The government has also accepted that in India there is a need to use different technologies.”  

Maruti sells two strong hybrid vehicles in India: Grand Vitara and Invicto. It plans to launch its first EV in the next few months and have six EVs by FY31. 

“Some states, like UP, have already taken steps in this direction. We now await a policy framework that would lead to the promotion of all technologies that result in petrol and diesel cars being replaced by cars using other technologies,” Bhargava says in the annual report. 

CNG drive 

CNG is now gaining acceptance in the compact sports utility vehicle (SUV) segment with Maruti’s Brezza and Fronx and Tata’s Punch. 

“With the government’s planned expansion of the CNG network (almost triple by 2030), it would see a rise in share, especially in the markets where CNG network is low,” the analysts noted. The government plans to increase the CNG network to 17,500 by FY30 from less than 7,000 currently. 

CNG vehicles are Rs 90,000-100,000 more expensive than equivalent ICE models, whereas hybrids are almost Rs 300,000 more expensive. CNG adoption thus is growing rapidly, accounting for nearly 15 per cent of the market volume in FY24 and expected to finish the current financial year with 17 to 18 per cent, a sharp increase from 3 per cent in FY19.

 

The draft CAFE III norms, effective April 2027, indicate the government’s push for EV adoption with an increase in super credit weight for EVs, the analysts say. CAFE is short for Corporate Average Fuel Efficiency and limits the amount of carbon dioxide a carmaker’s entire fleet can emit in a financial year.  

A senior industry executive says the CO2 emission targets of around 92 gm a km under the proposed CAFE III norms, which is lower than typical emissions of hybrids (95-130 gm a km), are impossible to meet with only hybrids, making EVs imperative.

“We do not see any incentives on HEVs forthcoming from the Central government, though some states may look to promote both EVs and HEVs, with the objective of supporting local manufacturing,” the Axis Capital report says. 

Global automakers nonetheless plan to offer hybrid tech in the Indian market to make the most of the current demand.

Hyundai Motors India, for instance, plans to introduce hybrid vehicles in the country. “I cannot specify the exact timeline, but we are planning and we are all present with our customers’ preferences,” Unsoo Kim, its managing director, said in October.

Similarly, Skoda Auto too plans to introduce hybrid variants, including of the next-generation Kushaq which is expected in three years, according to a senior company executive. "If customer demand picks up for hybrid vehicles then we will definitely look at bringing in a hybrid variant of the Kylaq too," Petr Janeba, Brand Director, Skoda Auto, said on the sidelines of Kylaq’s launch.   

Among Indian players, M&M has maintained that it is open to hybrid technology. Its CEO Anish Shah said in May: “We view hybrids as an extension of ICE with a slightly different powertrain. To the extent that is required, we would be ready for that.”

However, speaking earlier this year, Tata Motors Group Chief Financial Officer P B Balaji had said hybrids were used more for tax breaks than actually getting to zero-carbon emissions. Citing a recent report, he had suggested that most people who drove hybrid vehicles did it mostly on petrol.