What is India’s latest approach to localising EV manufacturing?

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| Photo Credit: The Hindu

The story so far

More than a year since it was announced, the Ministry of Heavy Industries Monday notified guidelines of the Scheme to Promote Manufacturing of Electric Passenger Cars in India. The scheme reduces existing duties on import of vehicles for overseas manufacturers from the present 70-100% to 15% subject to the maker meeting minimum requirements for investment and setting up facilities in the country. However, Union Minister H.D. Kumaraswamy indicating luxury EV maker Tesla’s unwillingness to manufacture in India have prompted concerns about the promise of the scheme.

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What does the policy propose? 

At the centre of the notified policy is the provision to reduce customs duty on the import of ready-to-ship completely assembled electric four-wheelers to 15%. This would apply to all vehicles valued at $35,000 – circumscribing cost, insurance and freight (CIF) – for a period of five years. However, this would be subject to the manufacturer investing a minimum of ₹4,150 crore over the next three years. They would also be expected to build infrastructure and facilities to enable 25% of the overall manufacturing activity be undertaken domestically (domestic value addition, or DVA) within three years, and 50% within five years. MHI specifies that a maximum of 8,000 vehicles can be imported at the reduced duty rate in a year with no carrying over of unutilised limits. The maximum duty permitted to be foregone under the scheme has been capped at ₹6,484 crore. Broadly, the objective of the overall scheme is to find a midway point where affordability for a captive market is attained, whilst also recognising that import substitution would require a layered approach and a protracted timeline. 

MHI calculated that an imported vehicle valued at $35,000 (₹29.75 lakh) would now be liable to pay basic customs duty of ₹4.6 lakh at the reduced 15% rate compared to ₹20.8 lakhs at the erstwhile 70% rate. Therefore, combining with IGST levied at 5% on the resulting value, the total foregone duty amount to ₹17.2 lakh with the final landing cost coming to about ₹36 lakh. Now, in line with an initial investment of ₹4,150 crore and a foregone duty of ₹17.2 lakh for each vehicle, the maker would be allowed to import 24,155 units in total.

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But does this help our overall ecosystem? 

Shouvik Chakraborty, Assistant Research Professor at the Political Economy Research Institute at the University of Massachusetts Amherst (U.S.) argues that a domestic industrial policy aligned with a vision for future could be a step in the right direction. Although he holds the current policy would bode well for India only if there is sharing of technology with domestic automakers. Further, he observes, “Countries these days are extremely cautious about transferring technology outside (to maintain their competitive advantage). In that light, India must not become a domestic hub for producing components of a vehicle.”  

Dinesh Abrol, adjunct faculty at the Transdisciplinary Research Cluster on Sustainable Studies at JNU in Delhi, observes that no foreign firm has ever helped build some other country’s ecosystem. He attributed China and South Korea’s ability to build manufacturing setups to their focus on skilling, research and development alongside undertaking innovation projects. “This enabled conditions for a technology transfer and prompting companies to come and invest into the ecosystem,” he states. Essential to note, China as the leading manufacturer of EVs accounted for 70% of the global manufacturing in 2024. 

The other set of concerns relate to the potentially increased focus on four-wheeler EVs, and their probable impact on India’s ambitions to achieve Net Zero by 2070. According to data compiled by the Federation of Automobile Dealers Association (FADA), EVs accounted for 7.8% of all vehicles sold in FY 2025. This was predominantly led by electric three-wheelers (at 57% in its category), followed by two-wheelers (6.1%), passenger vehicles (2.6%) and commercial vehicles (0.9%). Significantly, the International Energy Association (IEA) identified India as the world’s largest market for electric three-wheelers in 2024. Sales grew about 20% YoY, it observed. Mr. Chakraborty emphasises that most Indians travel by public transport, and policies must also focus on building the same. “Means of last mile connectivity, as bikes and shuttles, is also very important. It is not of much help if one has to walk few kilometres to avail public transport. This is not how we can fight climate change” he states. 

The final set of concerns relate to input costs. S&P Global Mobility observed in an analysis published March this year that high initial costs, typically 20-30% higher than ICE counterparts, coupled with India’s reliance on imported components and batteries “hinder” the growth of the EV sector. It held notwithstanding government efforts to promote localisation through varied policies, the rate was “not increasing as expected”. 

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What about our industrial ambitions in the EV space?  

Other than the impact on the ecosystem, concerns in the realm extend to costs and competitiveness.  Reuters had reported in December 2023 about Tata Motors opposing Tesla’s proposal to lower import duties. It had argued, according to the report, lowering duties would “vitiate” the investment climate which was premised around expectations of the tax regime favouring locals remaining unchanged. The automaker had further held that India’s EV players required more government support in the early growth stage of the industry. According to IEA’s EV Outlook, domestic OEMs accounted for more than 80% of the electric cars produced domestically in 2024. Additionally, it attributed a less than 15% share of Chinese imports in the country’s EV sales in 2024 to high import duties on EVs and the availability of locally made, affordable electric models.  

Thus, the lowering of duties prompt concerns about the potential impact (though not potentially from China) on domestic industries. 

According to Mr. Abrol, the policy is premised around foreign-capital and is export-focussed. He suggested the policy should instead be oriented toward building local ecosystem and spurring research and development alongside innovation. Mr. Abrol holds the lack of availability of skilled persons is due to the missing contribution of the public sector. Mr. Chakraborty further states, by nature western technologies in general are more capital-intensive than those in labour-intensive economies. “Even if it is export-oriented, it will create jobs in an area,” he states, adding, “However, the overall context needs to be considered in terms of how many jobs it is displacing, this is also considering that EVs have less conventional parts than a gasoline-powered vehicle.”