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India must get real about electric vehicles

Green transport subsidies should not be prioritized over health and education

| India
Traffic moving through heavy smog in New Delhi in November   © Reuters

Less than two years after announcing plans to eliminate hydrocarbon-fueled vehicles from Indian roads by 2030, Prime Minister Narendra Modi's government has cut its target for electric vehicles to 30% from 100%.

The scaling back of ambitions reflects growing recognition in New Delhi of the difficulties involved with going electric. But the government's maneuvering has obscured a larger issue: a significant increase in the proportion of electric vehicles on Indian roads would require massive government subsidies. This cannot be justified in a nation that struggles to provide basic amenities such as public toilets, let alone universal healthcare and education.

Power Minister R.K. Singh, who announced the revised target at an e-mobility conference on March 8, said that India "must ensure that by 2030, 30% of our vehicles run on electricity, to leave behind a better world for our grandchildren." Singh promised to publish regulations for power distribution and charging infrastructure within 20 days.

A switch to electric vehicles would bring multiple benefits to India, notably reduced urban pollution. The World Health Organization estimates that half of the world's 20 most polluted cities are in India. This is hazardous for the resident population and is harming economic growth by deterring foreign investors.

Boosting EVs would also help the economy more directly by reducing India's reliance on crude oil imports, which supply 82% of its needs. The cost of imports is otherwise forecast to amount to $300 billion a year by 2030.

Affordable EVs could help the local automotive industry, which contributes significantly to the economy. India made 4.5 million cars and commercial vehicles in 2017, making it the world's fifth largest producer, according to the Organisation Internationale des Constructeurs d'Automobiles, a global manufacturers' body. Yet in terms of vehicle ownership, India lags far behind its neighbors, with just 32 cars per 1,000 people, compared with China's 83 and Sri Lanka's 76.

However, even the scaled-back target for EVs will require India to overcome serious problems, some of which involve issues not under its control.

The first is the cost of electric vehicles. Currently, electric subcompact cars are almost twice as expensive as models with internal combustion engines. Pricey batteries needed to store power account for half of the cost of electric vehicles. Battery costs are forecast to fall to less than 30% of current levels by 2025 as technology advances and economies of scale begin to emerge. Even so, the price of electric vehicles will still be around 50% higher than traditional vehicles without government support.

To encourage sales, the government will need to offer tax relief. The Society of Indian Automobile Manufacturers has called for the goods and services tax on electric vehicles to be slashed to 5% from the current 43%-48% and for buyers to be able to deduct 30% of a vehicle's price from their income taxes. SIAM also wants EVs to be exempted from road tax, a special excise tax on vehicle sales.

But tax relief on this scale would inflict a huge fiscal burden on the government, potentially skewing spending toward middle-class buyers at the expense of the poor.

Aside from this moral issue, huge practical problems remain to be resolved, notably the need to assure the availability of electrical power to charge EVs. Almost 300 million people in India do not have access to electricity or are subject to frequent power cuts. The government failed to hit an initial target of providing reliable electricity to the whole population by 2012 and is now aiming to do so by 2019.

Even if the delayed target is achieved, state electricity commissions must issue licenses before power can be diverted to EV charging stations. Given the number of regulators involved, a pan-India licensing system would make sense, but that would require the comprehensive revision of laws and regulations covering both private and public distribution companies. This is a regulatory minefield that would take years to iron out.

The government has tried to take the lead on charging through its own network, setting up almost 4,000 charging stations at government offices. It is currently procuring 10,000 electric cars for official use. However, the government chargers would still just be a drop in the ocean compared with more than 56,000 gas stations spread across India.

One possible approach is to entice private companies to set up charging stations. French energy provider Engie has expressed an interest in working with India. But the turbo chargers used in such stations would have to conform to Indian electrical protocols and standards would have to be widely improved. Private-sector provision of charging stations would be directly linked to demand, which will be reduced by the government's decision to cut the 2030 target for EV penetration to 30%.

Supposing that power supplies across the country can be provided, it remains unclear how much Indian automotive companies would benefit. EV manufacturing will be limited by the industry's ability to acquire supplies of lithium, a vital component of car batteries which is in short supply within the country.

The government is pushing the public sector and major oil companies to form alliances and partnerships with South American countries which have large lithium reserves. Bolivia, which has the world's largest deposits, has shown an interest in supplying Indian companies, but it is also talking to U.S., Chinese, and European entities with deeper pockets that may be able to outbid India.

The unpalatable truth is that the government's roadmap for electric vehicles is riddled with potholes. A proper feasibility analysis is needed before any attempt to ramp up the necessary infrastructure can go ahead. But it is not just the physical challenges that will hold back the program. The government must first convince Indians that it makes sense to divert funds to develop the sector at the expense of spending on the poor. Failing to achieve that objective will likely drive even the scaled-back program off the road.

Sarika Rachuri teaches economics at IBS ICFAI Business School in Mumbai.

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