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Budget 2024-25 and its impact on the Indian EV market


A Tesla Model 3 being charged


Overview of Interim Budget 2024-25

On February 1st 2024, Mrs Nirmala Sitharaman, the finance minister (FM) of India unveiled the interim budget for the fiscal year 2024-25. The reception to this interim budget has been fairly positive, as it has promised fiscal support for supply side and technological advancement across the country. Some key takeaways from the budget, that highlights this focus on technological advancement are highlighted below:

  1. Public sector CAPEX spend is expected to be INR 11.11 trillion in the coming fiscal year, amounting to 3.4% of GDP, having grown by 11.1% from the last fiscal year

  2. A corpus of INR 1 trillion has been created for investment in “sunrise” sectors in India.

  3. Increased focus on solarization, with a target of 10 million (1 crore) houses to be aided in getting rooftop solar panels which enables them to obtain 300 units of free electricity per month

  4. Increased focus on electronics manufacturing, with an INR 155 billion allocation to various programs in semiconductor manufacturing, mobile and IT hardware manufacturing PLI scheme. 


One industry that has been pleased with the announcements of the interim budget is the Indian EV sector. The above announcements spell good news for the Indian EV sector, which is already on a monumental growth trajectory and this added support from the government will be instrumental in overcoming existing challenges in EV adoption across India. 


We look to examine the impact of this budget on the industry and how it affects future strategic plays in the industry, and what it may spell for current and prospective investors. 


Current Paradigm of the Indian EV Industry

Over the last 2 calendar years, EV sales have grown tremendously.   


Calendar Year

Number of EV sales

Jan 2022 - Nov 2022

924,111

Jan 2023 - Nov 2023

1,387,411

% change 

50%

Source: Autocar Pro (2024), data from Vahan (2023)


The above table shows that EV sales experienced a 50% growth over the last two calendar years. Most of the volume growth is coming from “affordable” vehicles such as 2 wheelers and 3 wheelers, accounting for 56% and 38% of the share of sales respectively. Cars, accounted for 5.35% of the sales, and commercial vehicles accounted for 0.35% of the sales in 2023. 


Despite the breakneck speed of EV adoption in India, there are some pertinent issues that are hindering the widespread adoption of EVs in India. While EV adoption rates have grown rapidly, overall penetration rates are less than 1%. 


For starters, the lack of an adequate charging infrastructure. According to a survey conducted by The Economic Times (ET), it was reported that 51.7% of the respondents said that they were unwilling to convert to EVs because of a lack of a widespread charging network. The charging infrastructure in India is currently bogged down by 2 issues: low availability and high set-up costs. 


The cost of setting up a public charging station is close to INR 2 million, accounting for the type of chargers and other infrastructure and installation costs. While the costs of setting up a charging station is less than setting up a standard fuel station, which can go up to INR 10 million to INR 50 million, the low levels of EV penetration make it economically unfeasible due to low levels of overall demand.


The Minister of Heavy Industries, Mahendra Nath Pandey reported in 2023 that India’s 9 biggest cities will need 18,000 charging stations by 2030 to provide the supporting infrastructure for India’s increasing EV adoption. Currently, India as a whole has 6,283 charging stations as of March 2023, with Maharashtra, Delhi and Karnataka having the highest number of charging stations across the country. The lack of charging stations, coupled with the range anxiety relating to EVs is making it tough for vehicle buyers in India to purchase EVs.


Another key issue that is holding back increased penetration of EVs is the high up-front cost of the vehicles. EVs are indubitably more expensive than their ICE counterparts, given that the technology behind EVs is much more resource intensive and younger than ICEs, so it's taking time to achieve the same economies of scale that ICE vehicles have achieved. In a market as price sensitive as India, it becomes a difficult sell for EV manufacturers to get people to shift from ICE vehicles to EVs.


Lastly, many people are concerned about the safety aspects of EV. Isolated incidents faced by some EV manufacturers have resulted in EVs being perceived as unsafe in India, despite them being safer than ICEs in terms of fire protection and crash prevention (given their low center of gravity). 10.2% of the respondents to the ET survey mentioned that safety was a key factor in determining their purchase decision.


Budget 2024-25: Will it Bring a Paradigm Shift?

The EV industry received a significant amount of focus from the government in the interim budget for FY 2024-25. In her speech, the finance minister emphasized focus on supporting manufacturing and charging infrastructure to push adoption. We highlight some of the steps that the government has taken to push the EV industry growth below. 


Firstly, the government has allocated INR 35.00 billion as production linked incentives (PLIs) to India’s automotive manufacturers, which increased from INR 4.84 billion from the previous year. The PLI scheme has 2 components, Champion OEM incentives and the Component Champion incentive for hi-tech and high-value components. The government has approved 18 companies including Maruti Suzuki, Bajaj Auto, Hero MotoCorp, and Ola Electric among others for the Champions scheme, and 67 other companies under the Component Champion category.


Secondly, the government has allocated INR 27.61 billion to the FAME subsidy scheme, and there is an indication that it will continue their end user focused FAME 2 scheme in the coming fiscal year. While their allocation to the scheme has fallen over the last fiscal year, adoption has picked up enough speed to be self-sufficient while the government focuses their attention on infrastructural issues relating to the charging stations. 


Thirdly, as we mentioned above, there has been an increased focus on CAPEX and sunrise sectors. The government plans to spend INR 11.11 trillion on infrastructure CAPEX in the coming fiscal year, and a corpus of INR 1 trillion has been allocated for sunrise sectors, which will be allocated to relevant companies as an interest free loan, with a term of 50 years. It can be safely assumed that a notable portion of this will be allocated to the expansion of electric vehicles in public transportation through e-buses, and expanding the pan-India charging network. 


Private market investment in the EV industry grew exponentially between 2015 till 2022, and slowed down in 2023, as a result of global investor risk tolerance dropping. The interim budget’s provisions on exempting tax on long term capital gains and dividend incomes earned by foreign investors, particularly Sovereign Wealth Funds (SWFs) and pension funds (PFs) may boost overall foreign investment into India, and the benefits should be accrued by the EV industry too.


Private investments in the Indian EV industry between 2015 and 2023

Source: Tracxn Technologies (2024), SRF Analysis


We expect funding in the EV industry to experience an uptick on the back of the interim budget announcements, particularly in the charging infrastructure sub-segment, which has grown consistently over the past decade, both in terms of number of deals, as well as the overall funding disbursed.


Investment trends in the EV charging infrastructure sub-segment between 2016 till 2023

Source: Tracxn Technologies (2024), SRF Analysis


What’s Next For the EV Industry in India?

Participants in the EV industry have welcomed the announcements made in the interim budget, hailing them as critical for boosting the penetration of EVs in India. The focus on supply side measures, particularly the PLIs, increased CAPEX expenditure, and an emphasis on solarization for cheaper electricity are all steps that potentially expand the size of the EV industry in India, and enable a faster shift away from ICE vehicles. 


However, practitioners in the segment have urged for greater support in terms of reforms that can lead to easing of day to day operations for these companies. A clear reform that most practitioners are pushing for is bringing the GST rate on batteries down from 18% to 5%. This will bring parity in the cost of EVs with fixed batteries and for those where batteries are sold separately. Moreover, practitioners are looking for the same 5% rate to apply to the cost of charging, across all states in India. Secondly, practitioners are looking for an extension of the FAME II subsidy, past 31st March 2024 for the end consumer, which reduces the financial burden of purchasing EVs for the end consumer, thus driving sales and penetration. 


In terms of investment trends, we believe that the focus of investors will now shift away from OEMs, and towards manufacturers of components, and companies looking to expand the charging network either through hardware or software. India has produced many prominent OEMs over the past decade, but the PLI scheme’s focus on components and increased CAPEX with a focus on charging networks means greater business expansion opportunities for incumbent companies in these spaces. Investors are likely to shift their focus on these companies and will have a crucial role to play in the overall success story of EVs in India.


The future of EVs looks bright without a doubt, but the effect of these supply-side reforms on for their respective recipients will only become evident with time. While it can be argued that the work done by the government so far to push EV adoption has been instrumental in driving the adoption rates, the next frontier for both the government and innovators is to work towards lowering the upfront costs and expand the charging infrastructure to enable greater penetration across India. Additionally, EV adoption cannot just be a phenomenon experienced in tier 1 cities. For India to meet its climate goals, adoption has to be widespread, and the consumer pain points in smaller cities, towns and even rural India need to be addressed to drive further penetration. Wealth levels are growing consistently in semi-urban and rural India, and so is awareness of emissions and the problems it creates. A widespread charging infrastructure would definitely foster sales in these areas too.


To learn more about our EV practice and how we can help your EV startup achieve get on the path of exponential growth and profitability, write to us at info@spiceroutefinance.com


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