One of the biggest challenges that the automobile industry faces is making electric vehicles more attractive for personal use from the point of cost.
Abhijit Kumar Dutta
Less than a week after finance minister Nirmala Sitharaman, in her maiden budget speech, reiterated the government’s support for electric mobility, Korean automobile major Hyundai has gone ahead and launched the Kona — the country’s first fully electric SUV — with a price tag of Rs 25 lakh.
While the carmaker needs to be congratulated for supporting the government’s electric push, the pricing of the vehicle remains a talking point. The blunt query is how many Indians will be able to or willing to shell out Rs 25 lakh for an SUV like the Kona. Particularly when fossil fuel driven SUVs of comparable dimensions are available at less than half the price (for example, a diesel engine powered Hyundai Creta has a price tag of little over Rs 11 lakh).
The question is, perhaps, not confined to Hyundai’s latest offering but extends to the affordability of electric vehicles in general.
Before looking into this affordability aspect, let us recapitulate what the government has offered in this year’s budget to provide a big push to electric vehicles. The Union budget, tabled in Parliament on July 5, proposed to cut the goods and services tax (GST) on electric vehicles from the current 12 per cent to 5 per cent by recommending it to the GST Council. In addition, an income tax deduction of up to Rs 1.5 lakh can be claimed on the interest paid on loans taken to buy such vehicles. The move is expected to save tax of around Rs 2.5 lakh over a five-year period for tax payers. However, the last date of taking the loan is March 31, 2023. The budget also reduced customs duty on parts exclusively used for electric vehicles such as e-drive assembly, on-board charger, e-compressor, and charging gun to zero.
It has to be kept in mind that the concessions announced by Ms Sitharaman come over and above the Rs 10,000-crore package implemented by the government in April this year under the second phase of the Faster Adoption and Manufacturing of Electric Vehicles scheme (FAME II) to hasten the development of electric vehicles and related infrastructure.
Amid this excitement about electric mobility let us not forget that one of the biggest challenges that the automobile industry faces is making electric vehicles more attractive for personal use from the point of cost. That the auto makers are concerned about the issue is clear from the comments of senior executives of domestic auto majors. According to one official, a Rs 5-lakh petrol car will cost Rs 10 lakh to be converted into electric. If such is the conversion cost, then what benefit will it bring to the middle class that opts for small cars?.
In fact, the Rs 1.5 lakh income tax deduction on purchase of electric vehicles announced in this year’s budget will only make sense if a customer can really be induced to buy an electric car. If the vehicle price is prohibitive, will a buyer really care for tax reliefs on such purchase?
However, some industry veterans have a different take. They feel that instead of being fixated on the buying price one should focus on the overall lifetime ownership cost of electric vehicles. With the bouquet of initiatives — FAME II and budget concessions, they argue, such cost should come down making electric vehicles attractive.
The gap in such an argument is that unless proper infrastructure (read charging stations) is in place and the pace of localisation of inputs picks up, it is difficult to bring down the overall running cost.
Hyundai India managing director and chief executive officer S.S. Kim has a very pragmatic view on the pricing of electric vehicles: In an interview to Business Standard he said: “The price of a vehicle depends completely on the economy of scale, on whether we have meaningful demand from the market. Our vendors and suppliers will only do business on a reduced cost if they see the volume of scale.”
The key point is if electric vehicles are to be made affordable then localisation of inputs has to go up dramatically. In case of Kona, for example, Hyundai is importing most of the parts from South Korea and localising only the bulky components such as seats and bumpers. As Kim puts it: “For localisation to increase, the volume has to grow. Only then original equipment manufacturers will be able to strike meaningful deals with suppliers and vendors.”
It is true that unless sufficient demand is generated, it is difficult to achieve the extent of localisation that the government or industry desire. And for that localisation to happen, huge investment is necessary which no manufacturer will be willing to commit unless there is an assured demand. On the other hand, for demand to pick up the product has to be affordable.
According to the Economic Survey for 2018-19, “It may not be unrealistic to visualise one of the Indian cities emerging as the Detroit of EVs (electric vehicles) in the future”.
For that to happen, we need the vision of the government, innovation from industry and initiatives by manufacturers to lower the overall lifetime ownership costs of electric vehicles and make them an attractive alternative to conventional vehicles for all consumers.Abhijit Kumar Dutta is a freelance writer. Views expressed are personal.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.