Budget 2026: India's EV sector needs a shift in strategy

Representative image (Courtesy: Reuters file photo)

The Union Budget 2026 presents could serve as a perfect opportunity for finance minister Nirmala Sitharaman to announce a foundational shift for the electric vehicle sector from short-term incentives to enduring structural reforms.

While subsidies offer temporary boosts, they often create market distortions and foster dependency, hindering sustainable growth.

Instead, a strategic focus on addressing deep-rooted issues like inverted duty structures and working capital inefficiencies will cultivate a stable, predictable, and competitive environment.

This approach will not only unlock smoother manufacturing scale-up and accelerate EV adoption but also ensure long-term, self-reliant growth for high-value manufacturing.

Structural clarity over incentives

While subsidies and direct incentives can provide temporary relief, they often create market distortions and foster a dependency culture within the industry. They do not address fundamental systemic issues and can lead to boom-bust cycles. Structural reforms, conversely, focus on establishing clear, predictable, and stable regulatory frameworks that reduce ambiguity and risk.

This predictability is crucial for long-term investment planning, encouraging manufacturers to commit capital to capacity expansion, technology upgrades, and R&D. By addressing root causes rather than symptoms, structural reforms cultivate sustainable competitive advantages, fostering a robust and resilient manufacturing ecosystem less reliant on government handouts.

Rectifying duty anomalies

A significant impediment to domestic manufacturing in the auto and EV sectors is the prevalence of inverted duty structures. This occurs when tariffs on imported finished goods are lower than those on imported components or raw materials.

Such a scenario makes it more cost-effective to import fully assembled vehicles or sub-assemblies rather than manufacturing them domestically, directly discouraging local value addition and job creation.

Rationalizing these customs duties across the entire value chain—from basic raw materials and intermediate components to final products—is critical.

Alleviating Working Capital Friction

The automotive industry, particularly the transition to EVs, is inherently capital-intensive and requires significant and continuous access to working capital. Manufacturers frequently face challenges such as delayed Goods and Services Tax (GST) refunds, extended credit cycles with suppliers, and constraints in inventory financing.

These issues tie up crucial capital, strain balance sheets, and impede smooth operational flows, slowing down production and growth. Solutions include streamlining and accelerating GST refund processing, implementing robust supply chain financing mechanisms to provide liquidity to both manufacturers and their vendor ecosystems, and ensuring improved access to affordable credit through preferential lending schemes or simplified loan procedures.

Easing these financial frictions will allow manufacturers to invest more confidently in production, manage inventory efficiently, and respond agilely to market demands.

Unlocking sectoral growth and EV adoption

The synergy of structural clarity, rationalized duty structures, and eased working capital friction creates a powerful enabling environment for high-value manufacturing. With reduced policy uncertainty and a level playing field, manufacturers can confidently invest in new technologies, capacity expansion, and R&D.

This will lead to greater economies of scale, enhanced product quality, and ultimately, more affordable vehicles for consumers. For the EV sector, these reforms are paramount; by reducing production costs and increasing local content, they would make electric vehicles more accessible and attractive to a wider consumer base, accelerating India's transition to sustainable mobility.