Electrifying India’s two-wheelers: Supply-side incentives and beyond

As consumer cost parity draws near for electric two-wheelers in India, the market is poised to shift gears from its nascent position to a more mature state. The next few years are therefore crucial policymaking years, and it’s useful to look at the interlinkages between demand, supply, and the evolving policy landscape, as these will individually and collectively impact the pace of market transformation.

Indeed, now is quite an interesting time to examine the nature and extent of incentives available in India for manufacturing electric vehicles (EVs), batteries, and their components. The Central Government recently issued a Production Linked Incentive (PLI) scheme that sanctions a significant amount—INR 26,000 crores (US$3.5 billion)—for manufacturing of vehicles and components across the entire auto sector. This supply-side initiative includes EVs and is over and above the PLI scheme of INR 18,100 crores (US$2.6 billion) that was already sanctioned for advanced chemistry cell (ACC) battery manufacturing. Considering these with the generous FAME-II consumer incentives on electric models, we see the Central Government is offering substantial and layered benefits across the EV market.

Supply-side incentives are often implemented with the broader strategic objective of creating a localized supply chain, and such incentives ideally also contribute to economies of scale that translate into lower production costs. Indeed, these are among the driving forces behind the Central Government’s new PLI. But incentives aren’t only from the Central Government. Nineteen states in India have now issued promotional policies for EVs. While demand side/consumer incentives are the cornerstone of many policies, including those in Delhi, Gujarat, and Maharashtra, several other states such as Tamil Nadu, Karnataka, Andhra Pradesh, Punjab, and Uttar Pradesh are among those that have a strong focus on supply-side/manufacturer incentives. For example, Karnataka recently amended its EV policy to include PLIs of 1% of revenue for 5 years for large-scale EV assembly and manufacturing units.

Additionally, Andhra Pradesh, Assam, Goa, Haryana, Gujarat, Karnataka, Madhya Pradesh, Orissa, Telangana, and Tamil Nadu offer capital subsidies across the EV supply chain. On average, subsidies range from 15% to 25% of total investment or fixed asset value. Tamil Nadu further offers preferential capital subsidy rates for investments made in battery manufacturing and additional capital subsidies for components and charging infrastructure manufacturers. Some states limit the total subsidy, and the limit varies according to the scale of investment. On average, the cap ranges from INR 20 crore to INR 40 crore (US$3 million to US$6 million) for large-scale projects.

In some regions, the capital subsidy is geographically linked. Assam offers capital subsidies over and above the 30% capital subsidy available under the North East Industrial Development Scheme (NEIDS), 2017. In Tamil Nadu, the capital subsidy for land is higher for investments made in its southern districts, and in Gujarat, also, capital subsidies have a district-wise banding. States like Andhra Pradesh and Madhya Pradesh offer additional capital subsidies toward the incorporation of cleaner production measures, as certified by the state pollution control boards, in their manufacturing processes and green/sustainability measures within the factory premises and land.

Assam, Bihar, Karnataka, Tamil Nadu, Telangana, and Uttar Pradesh offer incentives on finance costs. On average, interest subvention on term loans ranges between 3% and 6% in Tamil Nadu, Telangana, and Assam, and between 10% and 20% in Bihar. Uttar Pradesh provides 50% to 60% annual interest reimbursement toward loans for land acquisition and infrastructure development for EV parks, and 5% annual reimbursement toward loans for individual projects. Karnataka offers interest-free loans toward repayment of net Goods and Services Tax (GST) on 60% to 95% of fixed asset value.

There are also incentives in the form of concessions on things like taxes, tariffs, and duty. These are perhaps the most widely available across all state EV policies. Karnataka, Tamil Nadu, Telangana, Andhra Pradesh, Bihar, Haryana, Madhya Pradesh, Punjab, and Uttar Pradesh all offer varying degrees of exemption/reimbursement on land-related charges. In most states, the stamp duty and land conversion fees are eligible for 100% reimbursement. States also provide reimbursement toward state GST (SGST) payments with up to 100% reimbursement in most cases.

On energy tariffs, most states offer 100% reimbursement toward the state duty on electricity tariff. Over and above duty exemptions, Telangana offers a 25% discount on the electricity tariff for 5 years, capped at INR 5 crores (US$1 million), while Andhra Pradesh and Haryana offer discounts on the fixed cost component in electricity tariffs ranging from INR 1 to INR 3 per kWh, for up to 5 years. Andhra Pradesh and Haryana additionally offer 50% discounts on industrial water tariffs for up to 3 years.

Andhra Pradesh, Haryana, Madhya Pradesh, Punjab, and Telangana offer incentives and prioritized land allocation for the development of EV parks with readymade “plug and play” infrastructure. Further, these states offer infrastructure benefits for individual projects such as reimbursement for the costs of water treatment plants and dedicated power feeder lines for battery testing with special tariffs during non-peak hours.

Maharashtra, Haryana, Punjab, Madhya Pradesh, and Telangana offer the possibility of customized incentive packages for large-scale manufacturing plants including giga-scale battery plants. Under the aforementioned ACC PLI scheme for batteries, project developers would need to enter into a tripartite agreement with the state and central governments, and Maharashtra’s policy, for example, promises competitive state-level support to bid for ACC PLI benefits.

Tamil Nadu and Uttar Pradesh offer 50%–100% contribution toward employee provident funds (EPF), while Punjab offers a fixed annual allowance tied to new jobs created. On average, these benefits for new job creation range between INR 35,000 to INR 50,000 (US$500 to US$700) per employee annually. Karnataka, Tamil Nadu, Andhra Pradesh, Haryana, and Madhya Pradesh also offer additional skilling and reskilling allowances for contractors and assembly line workers. On average, these are in the range of INR 10,000 (US$140) per worker annually.

To analyze the impact of the various incentives on unit-level production costs—for high-value component costs such as batteries and motors, as well as full-vehicle costs—I conservatively assumed that the central and state incentives described above lower battery pack production costs by INR 15/kWh. Upon applying this assumption to mid-range motorcycles (150 km real-world range) in the model we previously developed, the following emerges (Figure 1):

• Upfront cost-parity timing without preferential GST and FAME-II subsidies moves forward by about 2 years, from 2036 to 2034.
• With preferential GST and FAME-II, upfront cost parity moves forward by 1 year from 2027 to 2026.
• With additional state incentives at the level offered by Delhi, upfront cost parity is achieved in 2022 both with and without supply-side incentives.

Figure 1. Upfront cost parity projections with supply-side incentives.

We see from Figure 1 that supply-side incentives can play a role in supplementing demand-side incentive schemes and in shortening the overall duration of the industry’s dependence on government incentives to achieve upfront cost parity.

Many new investments in vehicle electrification and supply-chain have been announced in the southern states of Tamil Nadu and Karnataka. With several other states now offering competitive incentives, it will be interesting to observe how the investment landscape picks up going forward. Further, most of the investments have been toward vehicle manufacturing, while investments in giga-scale battery manufacturing and component manufacturing have yet to gain much traction.

Of course, it cannot be discounted that regulations will play a big role in the transition. We know from our studies that leading EV markets globally—mostly in Europe, China, and the United States—have been supported through a combination of strong demand and supply-side policies, as well as industry-wide regulatory measures such as stringent fuel consumption standards and zero-emission vehicle credit mechanisms.

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