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Business Today |
Ashish Bagadia, Partner
Corporate Finance and Investment Banking

01 February 2023

The Indian Government has set an ambitious goal for EVs to make up 30 per cent of private cars, 70 per cent of commercial vehicles and 80 per cent of two and three-wheelers by 2030. It had implemented various policies and incentives to encourage the adoption of electric vehicles, specially incentivising the buyers through subsidies under the Faster Adoption and Manufacturing

of Hybrid and Electric Vehicles (FAME) scheme. So far, the Government has spent around INR 32.8bn cumulatively under the 2 FAME schemes.

The Indian EV industry has touched the milestone of one-million-unit sales in the calendar year 2022, accounting for 4.7 per cent of overall automobile sales, achieving ~4 per cent penetration for total two-wheelers volumes and ~50 per cent for three-wheelers volumes.

The current FAME-II scheme is scheduled to expire in March 2024. While the Government is likely to extend the same, it would be imperative to make the EV ecosystem self-sustaining, bring down the Total Cost of Ownership (TCO) and encourage investment in the EV ecosystem through various indirect benefits. These potential incentives could be split into two main buckets: (i) Incentives for investment and ecosystem building, including accelerated depreciation on vehicles and batteries, lower interest rates under priority sector lending and tax reductions, and (ii) Risk sharing - First Loss Default Guarantee scheme.

Higher penetration of EVs will be driven by commercial usage of the vehicles. These EV owners are extremely sensitive about unit economics and cashflows. For these owners to maximise the usage of their assets, battery swapping is a viable option, at least in the short term till the time technological advancements achieve a better balance between charge time and cost of the battery. There is an immediate need to define the depreciation rules specific to EVs and batteries, basis their useful life. Furthermore, the Government may want to consider allowing accelerated depreciation on EVs and battery-swapping assets to reduce the payback periods. Accelerated depreciation is a method of depreciating an asset that allows the owner to write off the cost of the asset faster. This can reduce the payback period by reducing the amount of taxes the owner owes in the early years of an asset's life. A higher depreciation rate will also allow better pricing of insurance cover for EVs.

Along the same lines, providing a higher tax shield on R&D spend will incentivise the manufacturers to invest in the localisation of the supply chain and develop products that are more suitable for Indian operating conditions.

The availability of vehicle financing is one of the biggest hurdles in the penetration of EVs in India. Currently, there are a limited number of lenders who are willing to take the risk on EVs, driven by a lack of clarity on the resale value since EV is still a budding segment. A lot of lenders who are financing EVs are charging 20 per cent+ interest rates, extending the TCO break-even point in a significant manner. The Government, in consultation with the RBI, is considering bringing EV financing into priority sector lending. An announcement to this effect can be expected in the upcoming budget. This would not only reduce the TCO and make financing affordable, but also facilitate lending to battery-swapping players.

To boost the participation from lenders in the EV market, NITI Aayog and the World Bank are setting up a USD 300mn first-loss risk-sharing scheme which will provide support to banks and NBFCs when payments on EV loans are delayed.

While 5 per cent Goods and Services Tax (GST) has been levied on EV vehicles, most of the spare parts are taxed at 28 per cent. Furthermore, charging-related services, both station-based charging as well as battery swapping, are taxed at 18 per cent GST which prolongs the TCO breakeven for EVs. There is an urgent need to deliberate this matter and harmonise the GST rate across the value chain and on the services ancillary to the EV industry. The Government may want to bring down the GST rate to 5 per cent on the entire EV ecosystem for the time being.

Till the time India develops its battery cell manufacturing infrastructure, imports will continue to play a crucial role. The current FAME scheme provides incentives for the purchase of a new vehicle but does not offer meaningful assistance for the replacement of batteries. A reduction in

import duties on the cells, for the time being, will reduce the cost of EV vehicles and will make them more affordable.

To summarise, the Government may want to reduce the dependence on cash incentives for accelerating the adoption of EVs and focus on reducing the pay-outs to the Government by the EV ecosystem, as a tool to make the EV industry achieve a much higher growth rate. This approach will also allow a larger fiscal room for the Government which is important in the current economic environment.

Source: Business Today