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What’s driving India’s electric vehicle sector in 2022?
18 min read
India’s commitment to slashing carbon emissions, shifting behaviours caused by the COVID-19 pandemic, and an annual crude oil import bill of over $100bn, are all motivating the development of a clean transportation programme. Mohua Mukherjee, Senior Research Fellow at the Oxford Institute for Energy Studies (OIES), reports on the burgeoning electric vehicle sector.
Today, 99% of vehicles on Indian roads still operate on petrol and diesel, but change is in the air. Frequent broadcasts and articles outline the pros and cons of electric vehicle (EV) ownership, and the media is abuzz with Indian start-ups competing in this growing market, offering a range of models and features for various budgets.
Even more importantly there is a marked upward trend in the numbers of EVs actually on the road. This applies particularly to e-commerce delivery fleets, but also to an increasing number of privately owned vehicles driving noiselessly around India.
EVs and COVID-19
Could the pandemic and its accompanying restrictions on movement have accelerated this shift to electrification? It is very likely. First, the pandemic saw a massive ramp up of online shopping and ordering by phone. This necessitated a surge of last-mile deliveries by e-commerce platforms, eateries and corner grocery stores during successive lockdowns (all at ‘no cost to the customer’ due to competitive pressures).
The online shopping and delivery boom coincided with unprecedented hikes in the federal and state tax rate on fuels from 2020 onwards. While crude oil prices were crashing on global markets during the early part of the pandemic, Indian retail prices at the pump were soaring due to hefty taxes intended to meet the government’s unbudgeted pandemic-related expenditures and make up for the tax lost by shutting down industries.
Corporates, restaurants, and corner grocery stores adjusting to the new normal of stay-at-home customers in 2020 were all forced, simultaneously, to find gig worker drivers with their own transport. To retain fickle online customers (when competitors are always just a mouse click away), adequate numbers of drivers were needed by all categories of merchants. The drivers’ costs, salary and a portion of their fuel expenditure were picked up by the seller.
Who were the drivers? In early 2020, many lower-middle income workers had just lost their clerical desk jobs due to the lockdowns. They had their own modest means of petrol or diesel-powered transportation, most likely mopeds, and they presented themselves as delivery partners on gig economy terms to earn a survival livelihood. This group was distinct from migrant urban workers who generally did not have their own transport and were therefore unable to apply for such jobs.
Studies have shown that the pandemic pushed millions of Indian families back into poverty, largely erasing the socio-economic gains of the previous decade. The backslide by lower-middle income workers to temporary or part-time contracts is one such example. Delivery drivers on average worked 12-hour days and earned around the equivalent of just $7–8.
Problems with electrification
Delivery drivers were regularly being poached by competitors and so some companies offered partial or full fuel reimbursement to their workers using vehicles with internal combustion engines (ICEs). However, they soon noticed that fuel costs had nearly doubled over the 2020–2022 time frame. E-commerce platform companies therefore began to seriously consider the pros and cons of investing in light e-vehicles that operated on batteries instead of petrol and diesel.
In India, upfront costs of EVs powered by lithium-ion batteries are 60–70% higher than that of an ICE vehicle. The selling point of EVs is that the total cost of ownership is less, but most individuals cannot obtain a loan to finance the high upfront cost.
Another issue was a shortage of charging stations. Many states had dilapidated electricity infrastructure and most electric utilities did not have enough resources to rapidly build out the required public EV charging networks. Therefore, only those who were privileged enough to have a dedicated parking spot at home, equipped with an electricity outlet, could consider that an EV might be an attractive way to avoid expensive fuel purchases.
The government has had an incentive programme to subsidise the upfront cost of EV purchases since 2015, but it attracted little interest, even when fuel prices reached pre-pandemic highs. This incentive programme has subsequently been updated to subsidise the costs of building charging stations.
In India, passenger cars are not used by most of the population. The most relevant vehicles for electrification are:
- city buses;
- motorbikes and mopeds, generically referred to as two-wheelers (2Ws);
- three-wheeled passenger and cargo carriers (3Ws), called ‘tuk-tuks’ in south-east Asia; and
- passenger cars (4Ws).
These all began attracting interest due to the extremely high pandemic fuel prices.
But attracting interest alone is not enough – EVs must also be affordable to around 800mn consumers who earn extremely modest incomes of around $7/d ($200/month). The Indian government’s EV rollout needs to address the needs of this group.
A further group of around 400mn people earn between $20–30/d, and the remaining 100mn are in the top 5%, ranging from upper middle class to extremely wealthy. Purchasers of eligible light-EV models have started applying for government subsidies, but it turns out that for many consumers even a generous upfront subsidy that cuts the purchase cost of a basic electric moped to $1,600, is still insufficient to make it affordable.
What can be done?
India needs to focus on electrifying different types of vehicles used for mass transportation, to maximise the number of clean kilometres travelled. Diesel city buses, used daily by hundreds of millions of people due to heavily subsidised fares, are a prime target for conversion to e-buses.
The government’s procurement agency is currently aggregating demand for e-buses from various city governments, including Mumbai, Delhi, Bangalore and Chennai. Bulk procurement helps to secure discounts from original equipment manufacturers (OEMs) who then find it worthwhile to set up large production lines and can also secure financing against large, reliable orders.
Mumbai is even re-introducing electric (and air-conditioned) versions of the iconic red double-decker buses that have not been seen on its roads for decades. Innovative operating partnerships are also springing up, such as between transportation app provider Chalo and e-bus manufacturer Switch.
Various state and city governments are also experimenting with innovative ‘gross cost contracts’, which are a type of wet lease where third parties competitively bid to offer a fixed all-in cost per km, given the assurance of a minimum number of operating km/d. Bidders take responsibility for providing operation, maintenance and charging services for the e-buses for agreed periods of time.
These new types of experimental contracts and partnerships, together with bulk procurement and outsourcing of operations, have led to around a 40% reduction in e-bus costs. While the numbers running on selected routes in major cities are still in the low hundreds, there is every indication that they will rapidly increase their presence. For instance, Delhi is aiming for 85% of its buses to be electric in the next few years.
Moving on from e-buses, which offer the biggest bang for the electrification buck in terms of the number of shared passenger-kms, the most common type of personal vehicle on India’s roads is the ICE 2W. Tuk-tuks, or 3Ws, are always commercial vehicles, offering paid transportation services for either passengers or cargo. They are also a popular, though more expensive, option compared to the bus for short passenger trips in the city. Ride-hailing 4W fleet cab services like Ola and Uber are more expensive than 3Ws.
New business models like ‘battery as a service’ are emerging to address the affordability issue of electric 2Ws and 3Ws. The battery alone ($800) represents half the $1,600 cost of an EV 2W, even after the government subsidy. Some groups of EV 2W buyers (such as gig workers) prefer to buy only the chassis for $800 and enter a monthly subscription plan with a battery swapping service that allows them to rent a fully charged battery once or twice a day instead of waiting to recharge their vehicle.
This model is facilitated by an app that locates their nearest battery swapping station. They detach their spent battery and receive a fully charged one. The payment process is cashless and takes less time than a petrol filling station visit. Most 2W/3W delivery drivers use battery swapping services because they cannot afford to lose income while waiting for a recharge in the middle of the day.
The gradual shift towards EV 2W vehicles is now underway in India. Data on sales of EV 2Ws (mopeds) and EV 4Ws (passenger cars) for the first six months of 2022 show that a total of 240,000 EV 2Ws were sold during that period, compared to only 1,800 EV 4Ws. This is equivalent to an average of 1,300 EV 2Ws sold per day, compared to just 10 EV passenger cars sold per day in the first half of this year.
The primary motivation for India’s clean transportation programme is to reduce its annual crude oil import bill of over $100bn. India depends on imports for 85% of its crude oil needs. It regularly pays out at least 25% of its $400bn merchandise export earnings for oil imports, which are then domestically refined at state-owned and private refineries and marketed nationwide. Reducing precious foreign exchange payments for oil has become a very high priority and is directly linked to efforts to promote EVs.
The situation today
EVs of all kinds remain expensive and unaffordable to the vast majority of Indian buyers without the assistance of subsidies. The battery components as well as sourcing raw materials (including lithium and cobalt) also carry supply chain risks in a market dominated by one or two countries. India does not want to simply re-direct its annual crude oil expenditures to new suppliers.
The government has therefore decided to follow multiple strategies to complement EVs in decarbonising road transport. These include the promotion of biofuel, flex-fuel vehicles, compressed natural gas (CNG), hydrogen and hybrid electric vehicles (HEVs).
India is also actively exploring the revival of traditional routes on inland waterways for some cargo and passenger transport. These routes have been dormant for centuries as traffic shifted to roads, but barges and ferries may return to popularity.
Emissions can also be cut through promoting shared mobility and mandating the scrapping of older vehicles. All these pathways are critical if India is to keep its international commitment to the United Nations Framework Convention on Climate Change (UNFCCC) goal of reducing its carbon intensity by 45% by 2030 (from 2005 base levels).