Union Budget 2024: Anticipated Boosts for EVs, Hybrids, and Flex-Fuel Technologies to Drive Sustainable Mobility

India’s automotive industry saw robust growth in FY 2023-24, with passenger vehicle sales rising by 8% and electric vehicle sales jumping 42%. The upcoming Union budget can further support this momentum by incentivizing indigenous manufacturing, enhancing EV infrastructure, and promoting flex-fuel technology.

India’s automotive industry had a strong year in FY 2023-24, with significant growth across almost all segments, building on the healthy growth observed in the previous financial year. Passenger vehicle sales rose by 8% to 4.22 million units, while commercial vehicle sales saw a modest 1% increase, reaching 0.97 million units. The two-wheeler market expanded by 13% with 17.97 million units sold, and three-wheeler sales increased materially by 42% to 0.69 million units (with E-3 Wheelers making up for over 58% of the total three-wheeler sales). Overall, the industry’s domestic sales hit 23.85 million units, marking a 12% year-on-year growth. The electric vehicle (EV) market also made impressive strides, with total sales jumping 42% to 1.67 million units. E-2 wheelers led the charge with a 30% increase, followed by E-3 wheelers with a 57% rise, and E-4 wheelers almost doubling their sales. Backed by strong sales, the auto-component sector also thrived, with a record turnover of INR 5.6 trillion, up by 32.8%. Overall, FY24 was a milestone year for India’s auto industry.

Transitioning to renewable energy is important for India to achieve its net zero emissions objective by 2070, and the automotive industry plays an essential role in this journey. With electric vehicle (EV) penetration levels in India rising to 6.8% in FY24 from 5% in FY23, the industry is on an upward trajectory, but it requires robust government support to maintain this momentum. The upcoming Union budget presents an opportunity to adopt a growth-oriented strategy, prioritising indigenous manufacturing and incentivising adoption of alternative fuel solutions.

Areas where the Budget can support the automotive industry to aid this transition are:

• Boosting country’s energy transition readiness: India’s commitment to green and sustainable mobility is reflected in its ambitious “Panchamrit” goals, including raising the non-fossil fuel-based energy capacity of the country to 500 GW by 2030 (overarching goal being achieving net zero emissions by 2070). Despite significant regulatory and policy commitments, India ranks 63rd out of 120 in the World Economic Forum’s Energy Transition Index. A deeper dive into transition readiness highlights two critical areas requiring immediate attention: education and human capital, with fewer jobs available in renewable energy, and innovation, where environmental technologies constitute only about 10% of all technologies in India. Addressing these gaps is essential for accelerating the transition to electric and hybrid mobility.

To foster innovation within the renewables and alternative fuel technologies sectors, public-private partnerships and policy support are crucial. The Union Budget should focus on incentivising research and development, enhancing infrastructure for EVs, and promoting skills development in the renewable energy sector. These measures will be essential in positioning India as a leader in sustainable mobility and renewable energy innovation.

• Strengthening the EV ecosystem: Strengthening the EV ecosystem is crucial for India’s transition to green mobility. There’s significant anticipation for clarity on the FAME-III subsidy, which is expected to focus on mass transportation and alternative fuels but may exclude electric cars, even those for commercial use. Hybrid cars are expected to receive support as a part of the subsidy.

In addition to incentives aimed at boosting EV registrations, the budget should extend support across the entire EV ecosystem. This includes promoting indigenous production, enabling fast-charging infrastructure uniformly across the country, establishing a comprehensive battery swapping policy, and tailoring insurance norms for electric vehicles. Currently, EV manufacturing relies heavily on imported components, underscoring the need to support local manufacturers of battery packs, motors, controllers, and key electronics. Localising the supply chain is essential to bridge the cost gap between EVs and traditional internal combustion engine vehicles. A robust local supply chain can significantly reduce EV costs, making them more accessible and fostering sustainable growth in India’s EV market. With over 200 EVs per charging point compared to 20 in the US and 10 in China, India’s charging infrastructure requires rapid expansion (currently there are ~12,000 operational public charging EV stations in the country).

• Tax incentives to strong hybrids: Since subsidies for hybrids were discontinued in 2017 and the government imposed a 15% cess on hybrid cars under the GST regime, the tax incidence has risen from 30.3% excise to 43% GST, making hybrid cars significantly more expensive. Despite these higher taxes, hybrid car sales nearly matched those of EVs in the first quarter of 2024. While the government’s primary focus is on strengthening the EV ecosystem, there is potential to provide tax incentives for strong hybrids. These incentives would make hybrids more affordable, encouraging consumers to choose them over petrol and diesel alternatives. Such a move would not only reduce emissions but also bridge the gap during the transition to a fully electric vehicle market.
• Incentives for wider production of flex-fuel technology: With the government advancing the 20 percent ethanol blended petrol (E20) from 2030 to 2025, there is a requirement for an estimated 2.68 billion gals or 10.15 billion litres of ethanol. To promote the adoption of flex-fuel technology, the Union Budget should consider targeted incentives to address the associated challenges. Flex-fuel vehicles (FFVs) face issues such as increased engine wear due to ethanol, resulting in higher stress and corrosion. Additionally, fuel economy varies, especially with higher ethanol blends like E85, reducing overall efficiency. Infrastructure limitations also pose significant hurdles, necessitating substantial investments to support the shift, with an annual requirement of over 1,000 crore liters of ethanol for the E20 program. Budget incentives could include subsidies for research and development to mitigate engine wear, funding for infrastructure expansion, and financial support to offset the higher costs of FFVs. These measures would facilitate the adoption of flex-fuel technology and advance India’s commitment to sustainable mobility.

Globally, the automotive industry contributes to ~10% of world’s carbon dioxide emissions, with India being the third largest carbon dioxide emitter globally. The Union Budget presents an opportunity to drive India’s transition to sustainable mobility. By focusing on boosting the country’s energy transition readiness, strengthening the EV ecosystem, providing tax incentives for strong hybrids, and supporting the wider production of flex-fuel technology, the government can address key challenges and promote green transportation solutions. These measures will not only reduce emissions and bridge the cost gap between EVs and traditional vehicles but also position India as a leader in renewable energy innovation and sustainable mobility. A comprehensive, growth-oriented strategy in the budget will be instrumental in achieving India’s net zero emissions goal by 2070.

This article first appeared in Financial Express on 18 July 2024.