To clinch a free-trade agreement with the UK, India has reportedly proposed a reduction in import duty on electric vehicles (EVs). The UK’s demand for import concessions on EVs remains one of the few outstanding issues in the free-trade talks. Recently, US-based Tesla also proposed setting up a factory in India but has asked for lower import taxes in return. Reduced tariffs will enable foreign EV manufacturers to seek a foothold in the Indian market. Expectedly, domestic auto manufacturers are opposing the government’s proposal to open up the market even if it is done in a phased and calibrated manner. They instead demanded protection for the domestic EV industry and its investors. The fear is that reducing duties on EVs will negatively impact the entire domestic industry and harm the investment climate since it is considered a sunrise industry.
India’s EV market is at an inflexion point. The central government in 2021 announced a production-linked incentive scheme for the automotive sector, including local EV manufacturing, with an outlay of Rs 25,938 crore. It also announced the National Programme on Advanced Chemistry Cell with an outlay of Rs 18,100 crore. Further, it notified the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles scheme to promote hybrid/electric technology in transportation. The third version of the scheme is reportedly in the making. EV sales, as a result, in 2023 went up by over 45 per cent. Yet, the pace of adoption has been relatively slow, held back by the high costs and lack of an adequate number of charging stations. The government has also trod cautiously and focused on getting EV manufacturers to set up local production facilities instead of relying heavily on imports.
Import tariffs for EVs have remained high in India. The country levies an import duty of 100 per cent for fully assembled EVs priced above $40,000, while those below $40,000 attract a 70 per cent duty. By comparison, countries like the US, France, Saudi Arabia, and China have far lower import duties on EVs. Lowering import duty in a calibrated manner, however, should not threaten domestic manufacturers. After all, the Indian automotive market is the fourth-largest in the world, trailing behind China, the US, and Japan, and is valued at around $250 billion. The sector is expected to register a compound annual growth rate of over 9 per cent between 2022 and 2027, primarily due to steady export growth and a strong rebound in domestic sales. As Maruti Suzuki Chairman R C Bhargava has told this newspaper, the industry is as competitive as it is in the UK or China and Indian costs are lower for many models.
Therefore, instead of worrying excessively about threats from reduced import tariffs, there is a need to identify and address other structural challenges that have limited India’s EV market takeoff and resulted in sales of only cheaper models. For instance, policymakers can address the limitations in charging infrastructure and frictions in customer financing. The concerns and questions regarding the cost of ownership compared to internal combustion engine vehicles must also be addressed by both the government and industry players. Lowering important duties will increase competition in the sector, which would lead to better and cheaper EVs. This will help expand the market, benefiting all stakeholders. Besides, in a trade agreement, wider gains should not be lost because of concerns of some sectors. Some of the FTAs that India is negotiating are also critical because it is not part of regional trade blocs.
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