India's EV Dilemma: Are Subsidies Still Needed as Battery Prices Reduce?

With a growing focus on transitioning to green energy, discussions around electric vehicles (EVs) are gaining momentum. Both the government and private companies are aligning their goals toward creating a more sustainable, eco-friendly future.

For example, when ordering our favourite food, food delivery platforms often give the option to opt for delivery via electric vehicles (Swiggy calls it ‘Eco Saver’ delivery). The timing for the same might be more than ten minutes, but then it saves emissions by 27 per cent, as per Swiggy. 

No wonder, the demand for EVs has been increasing in India. Data from the Vahan portal shows that EV sales increased by 22.8 per cent year-on-year. Speaking about EVs, union minister Nitin Gadkari said recently that EVs don’t need subsidies anymore. With the cost of production coming down and customers choosing electric vehicles on their own, Gadkari mentioned that the there is no need for subsidies.

Gadkari also got the backing of Ola CEO Bhavish Aggarwal. Taking to X, Aggarwal mentioned that in the next two years, electric vehicles will be cheaper than conventional Internal Combustion Engine (ICE) vehicles. 

Not Against Any Additional Subsidy or Incentive, Clarifies Gadkari 

Soon after his statement on September 9, Gadkari mentioned that he is not against any additional subsidy or incentive for electric vehicles. He reportedly said, “If the Finance Minister and Industries Minister want to give more subsidy, then I have no problem.” 

Read: Electric Vehicle Makers No Longer Need to Be Subsidised by Govt: Gadkari

After Gadkari’s statement, EV companies are divided about whether the country needs to provide subsidies for the growth of the EV sector. Let's see what industry experts have to say about subsidies. 

To Subsidies or Not To Subsidies 

Some experts are of the opinion that subsidies act as a catalyst when it comes to the growth of EVs in the country. They believe that subsidies are necessary to help bridge the cost gap between EVs and traditional ICE vehicles.

“Since EVs currently have a higher upfront cost, with lithium-ion batteries accounting for approximately 30-40 per cent of the total cost of an electric vehicle, subsidies become important,” says Ankit Sharma, co-founder & director, Vidyuta Materials Pvt. Ltd., a company that produces cathode active material in lithium batteries for EVs.

Sharma adds that in India, the FAME scheme has been a key driver, contributing to the sale of over 1 million EVs by mid-2023. “Subsidies help drive down battery costs, which have already fallen by nearly 89 per cent over the past decade, but further reductions are essential for widespread EV adoption,” adds Sharma.

Read: Withdrawal Of Subsidy On Electric Vehicles May Lead To Stagnated Growth For 2 Years, Ather Energy CEO

While experts like Sharma emphasise that subsidies will help to keep India at the forefront of the global transition to electric mobility, some are of the opinion that subsidies are no longer required for EVs. Experts opine that they have had subsidies for a really long time, thus it is more than enough time for the industry to drop the crutches and walk on its own.

“Uncertainty in subsidies really hurts the industry. In our industry, investments take time to yield returns, and it’s very difficult to plan for future investments when there is so much uncertainty on subsidies today,” says Anirudh Ravi Narayanan, CEO of BNC Motors, an EV bike manufacturer.

Criticising the uncertainty, Narayanan says that while the government indicated that Electric Mobility Promotion Scheme (EMPS) will continue beyond September, there is no official notification about the same. "Without knowing the status of EMPS, we can’t plan our offers for festival season, which in turn significantly affects our supply planning," he adds.

Union minister for Heavy Industries HD Kumaraswamy said on September 9 that the EMPS by the government will be extended by the government after its due date is over in September 30. Under the EMPS scheme, the government offers a subsidy of Rs 10,000 for electric two-wheelers and Rs 25,000 for electric three-wheelers.

Earlier reports indicated that the government was drafting a proposal for a new round of subsidies under the Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme, with the third phase expected to launch in the next month or two. This phase was set to replace the existing Electric Mobility Promotion Scheme (EMPS).

However, as per a recent CNBC-TV18 report the government might be replacing the FAME scheme with the new PM E-Drive. While details about the scheme are not known yet, the report adds that it will have an outlay of Rs 10,900 crore. A large portion of the fund will be dedicated to increasing subsidies for purchasing electric vehicles and promoting electric buses. As of now, there is no official notification about the same.

Further, Narayanan suggests that the industry should say no to subsidies and stick to having GST at 5 per cent for the next 10 years. The 36th GST Council in 2019 reduced the GST rate on electric vehicles from 12 percent to 5 percent.

Has the Cost of EV Manufacturing Fallen in India? 

The main argument behind not giving subsidies to electric vehicles is the reduced cost of manufacturing electric vehicles. Factors such as reduced GST and localisation of manufacturing are the reasons behind the same. 

As per a Goldman Sachs report titled Electric vehicle battery prices are falling faster than expected published in November 2023, globally, battery prices are falling rapidly. 

The report indicates that battery costs are predicted to drop by 40 percent from 2022 to $99 per kilowatt-hour (kWh) of storage capacity by 2025. 

“The reduction in battery costs could lead to more competitive EV pricing, more extensive consumer adoption, and further growth in the total addressable markets for EVs and batteries,” said Nikhil Bhandari, co-head of Goldman Sachs Research’s Asia-Pacific Natural Resources and Clean Energy Research in the report. 

To add to it, Narayanan says that besides, the cost of cells, semiconductors and other input materials has come down significantly post-Covid-19. This, in turn, makes sense to go away with subsidies, he believes. To break the cost of production, Narayanan says that cost of cells was $160 per kWh 3 years ago, now it has come to $90 per kWh. This $70+ savings is about Rs 7,000 landed cost, he adds.

Amid strong vertically integrated in-house technology and manufacturing capabilities, companies such as Ola Electric are reducing the prices for EVs. The company recently slashed the price of its three S1 models by Rs 25,000. 

By 2030, the government targets 30 per cent electric vehicle penetration for private vehicles. Gadkari also said in June this year that he wants to eliminate diesel and petrol vehicles in the country in the next 10 years. As the debate prevails with regards to subsidisation of EVs, it will be interesting to see how the industry performs in the future.