Smoothening India’s green route

India is the largest two-wheeler (2w) and three-wheeler (3w) market globally and amongst the top markets in commercial vehicles and passenger cars. Unlike some of the major automobile markets like China, Europe and the United States, it has been relatively behind the curve when it comes to electric vehicles (EVs). However, over the past few years, the scenario has changed, with India gearing up for faster EV adoption.

India’s electrification journey is being driven by 2ws, as opposed to passenger cars in other markets. EV penetration reached 4.7% in FY24, with much of it driven by the electric 2w segment, although e-3ws and electric buses have also contributed to the same. The penetration share of EVs in two-wheelers touched about 5.4% in FY24, driven by the rollout of government subsidies, which have helped lower the cost of ownership.

The other factors contributing to the process have been increasing customer awareness, introduction of feature-rich models and improving technology. The growth in the e3w market has been historically led by the e-rickshaw segment, which saw a pick-up since FY2016, supported by low upfront and operating costs, and presented itself as a convenient and economical replacement for cycle-rickshaws. Excluding the e-rickshaw segment, the penetration of EVs in the 3W segment was relatively lower at ~8.7% in FY24.

Government's EV push

Another area of focus for the government has been the electrification of STU buses. Supported by various government measures, e-bus penetration in India has picked up over the past two years, and its penetration was close to 7% in FY24. Even as the electric passenger vehicle (PV) segment has seen healthy growth in FY23 and FY24, it has remained low (1.8% in FY24), with factors such as high upfront cost, range anxiety, and limited product portfolio constraining adoption. The Government of India’s efforts to enhance EV adoption through policy supporthas been instrumental in helping increase electrification adoption over the past few years. Although the reduction in the FAME subsidy benefit is a short-term impediment and may impact demand to some extent, the OEMs continue to strive to offer competitive products by leveraging their cost structure through localisation of key components and value engineering capabilities. Apart from the demand incentive from the Central Government, several states have EV policies as on date.

Policies and schemes will help industry grow

The Government of India has also announced the PLI scheme amounting to Rs 25,938 crore for auto and auto components, apart from the Rs 18,100 crore for ACC batteries to facilitate localisation. The new e-vehicle policy, announced in March 2024, also aims at increasing localisation, by stipulating domestic value addition requirements to avail import duty benefits on CKDs.

The charging infrastructure is currently at a nascent stage and there are only 16,000-17,000 charging stations as on date in India, although it has improved significantly from about 1,800–2,000 public charging stations in 2021. Lack of adequate charging infrastructure has been a key deterrent for EV penetration. The government is focused on improving the charging infrastructure across the country to help address range anxiety concerns related to EVs. We are seeing traction from both PSU and private players in the EV charging space.

Localisation is the key

At present, around 30-40% of the EV supply chain is localised. Chassis components that require minimal technology upgradation are manufactured locally. There has been substantial localisation in traction motors, control units and battery management systems over the years. However, advance chemistry batteries, which remain the most critical and the costliest components, accounting for almost 35-40% of the vehicle price, are mostly imported.

Most OEMs rely on imports for battery cells and manufacturing operations in India are limited to the assembly of battery packs. For a competitive cost structure, India will need to create its own localised eco-system. Multiple challenges exist on the road to establishment of a cell manufacturing ecosystem, the primary ones being technology complexity, high capital intensity and raw material availability. Battery manufacturers can enter into agreements/alliances with players across the value chain to mitigate risks, coupled with the creation of a robust framework for recycling would remain key.

Confluence of factors

A confluence of factors such as improving product portfolio, charging infrastructure and financing availability and a gradual decline in battery prices would aid in acceleration of EV penetration across segments over the medium term. Minimal range anxiety, limited upfront pricing difference and a viable total cost of ownership (TCO) will enable faster penetration in e2W, e3W and e-bus segments. EV penetration in the passenger car segment will be gradual, as lack of adequate infrastructure and high initial cost of ownership remain key hurdles. Having said that, from the supply side, the next 12-18 months are likely to witness the OEMs launching many new EV models.

Shamsher Dewan is Senior VP and Group Head, Corporate Ratings, ICRA.