Transition to Electric Vehicles: A Crucial Priority for the Government

In FY24, EV sales penetration exceeded 6%, with 1.7 million EVs sold out of the total of over 24.6 million automobiles sold during the year. The new government formed in June 2024 should prioritise a swift transition to EVs.

August 27, 2024. By News Bureau

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Climate and Sustainability Initiative

Greenhouse gas emissions

EV Manufacturing

Economic growth

Financings

The automobile sector is the largest contributor to the country’s manufacturing GDP, accounting for over 7% of the total. This sector is currently undergoing significant transformations with the rise of electric vehicles (EVs). In FY24, EV sales penetration exceeded 6%, with 1.7 million EVs sold out of the total of over 24.6 million automobiles sold during the year. The new government formed in June 2024 should prioritise a swift transition to EVs.

This strategic move can help reduce air pollution in many Indian cities, decrease dependence on imported fossil fuels, and cut down the sector's greenhouse gas emissions, which accounted for 13% of the total in 2016. Additionally, this will ensure that the country stays competitive in the global export market.

The previous government recognised the importance of this transition and implemented several initiatives such as FAME I & II, reduced GST rates of 5% for EVs compared to 28% or more for traditional vehicles, and state-level subsidies and reduced road taxes to create demand incentives. These measures have lowered the initial purchase cost of EVs. However, EVs remain expensive to produce, resulting in minimal or no profits per vehicle for new-age manufacturers, as reflected in their financial statements. In the two-wheeler category, where EV penetration has exceeded 5% with sales of over 0.9 million EVs out of 17 million two-wheelers sold in FY24, traditional players continue to have minimal presence due to these challenges.

Electric vehicles offer operational efficiencies that lead to lower operating costs, resulting in reduced life cycle costs for many commercial operations.

Amongst others, this is particularly beneficial for city-based quick commerce companies, where the shorter range of EVs is not a hindrance. Experts predict that the next significant development will be the electrification of road freight, currently dominated by diesel-guzzling trucks responsible for over 40% of road-based emissions. However, this transition poses several challenges, including limited product availability, low range, and high costs, which are 3-5 times higher than current alternatives. Despite these obstacles, the country could initiate a pilot with some 500 to 1000 trucks to create a track record and awareness for cases wherein the range of operations, operating hours, and charging requirements of electric variants amongst other do not hamper the business case.

The primary barrier to implementing such pilot projects as well the commercial operations is the availability and terms of financing. The lack of a performance track record and limited knowledge about the technology would lead financiers to offer less favourable terms. This would make most electric vehicle deployments unviable. The short tenure of financing, lower loan-to-vehicle value ratio compared to conventional vehicles, and higher interest rates would make electric truck deployment financially unfeasible for the majority of truckers.

To overcome these challenges, financiers need support in the form of risk mitigation instruments to extend credit on favourable terms. These terms could allow early adopters to profit from day one of operations and benefit from the lower operating costs of running EVs. Such instruments could include guarantees of either first loss at the portfolio level or other variants of credit guarantees against loans extended for EVs.

Contrary to popular narratives advocating for EV loans to be categorised under the priority sector loan (PSL), the regulator may find this difficult because auto loans already amount to over USD 50 billion of the approximately USD 2.1 trillion banking segment. Given EVs are likely to become quite large part of banking portfolio over next ten years any such move could divert funds from crucial areas like microfinance, which does not have a separate quota and is part of a larger pool under PSL. Also, the current macroeconomic structure of the banks and non-banks would make it difficult to have such a classification. However, regulators might consider introducing a short-term EV loan window for the next decade to support conventional channels like banks and non-banking financial institutions (NBFIs) in extending credit.

The government could also consider implementing measures like the accelerated depreciation to attract the necessary equity contributions to the charging infrastructure business. Additionally, providing viability gap funding to subsidise initial business setup costs could help alleviate concerns for both private and public operators. This combination could allow investors to use the unique property of the business, i.e., the negative working capital cycle, and allow players to invest without worrying about charging station utilisation patterns in the initial years of deployment. This would help solve one of the biggest challenges hindering the deployment of electric vehicles.

On the supply side, the government should explore the competitive advantages offered by South Asian and Central American nations in electric vehicle (EV) manufacturing. It should also consider taking incentives under the Production Linked Incentive (PLI) schemes to support our products, which may be a couple of development cycles behind as the EV manufacturing landscape is evolving rapidly on a global scale.

By addressing these financial and structural challenges, the new government can accelerate the adoption of electric vehicles, fostering a cleaner, more sustainable future while bolstering the country’s economic growth.

- Vaibhav Pratap Singh, Executive Director, Climate and Sustainability Initiative