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The Times of India

EV@30: How adequate finances, infrastructure can provide fillip to India's EV dreams

NEW DELHI: The next few years are going to be crucial for India’s transition to electric vehicles, with the Centre targeting to achieve at least 30 per cent sales to be electric by 2030.

This switch to clean mobility has become the need of the hour, considering the focus on climate change and building sustainable development goals.

In the recently released World Air Quality Report 2021, 35 out of 50 cities with the worst air quality were from India. In fact, none of the cities met World Health Organisation's (WHO) air quality standards of 5 micrograms per cubic meter (ug/m3).

It is a good thing that the government recognised the need to adopt measures for cleaner air and is pushing automakers to switch to electric vehicles (EVs).

In the past few years, the Centre has firmed up schemes to incentivise companies to build EVs and batteries locally, in order to boost supply and complement a slew of benefits for EV buyers.

However, automakers are facing many challenges to make this transition. They have been slow to adapt as the price of EVs continue to remain high due to soaring battery costs and components cost, apart from the inadequate charging infrastructure in the country.

According to a report by Niti Aayog, titled Banking on Electric Vehicles in India, the government think tank estimated that the cumulative investment in transition to EVs could be as large as Rs 19.7 lakh crore between 2020-2030. This highlights the need for higher liquidity and lower cost of capital for EV assets and infrastructure.

However, obtaining finances for EVs still remains a low possibility as financial institutions and banks often cite risks associated with assets or business models.

The report highlights that these risks are both real (uncertainty of resale value) and perceived (product quality). As a result, even if financing is available, EV buyers are unable to obtain terms (interest rates and tenures) that are comparable to ICE vehicles.

Besides finance, another major challenge is creating the appropriate infrastructure for EVs like setting up charging facilities, which is a major hindrance for buyers to choose EVs over petrol, diesel vehicles.

“The most pressing need for the EV sector to grow is financing. India needs to build an ‘Aatmanirbhar’ supply chain not dependent on the challenges of the global supply chain,” said Rachna Ahuja, director of Ingar Electronics.

Ahuja further stressed on the need to develop local manufacturing units in order to bring down import costs and boost local manufacturing.

"One of the arguments in the forefront of EV technology promotion is the freedom from oil imports and reduction of our import bills. This will only come true once enough local manufacturing capacity is developed and orginical equipment manufacturers (OEM) primarily source components from India itself," she added.

Fiscal initiatives for EV sector

The EV space in India comprises great opportunities for both budgetary allocations as well as corporate investments.

With adoption of Faster Adoption and Manufacturing of Electric Vehicles (FAME) phase I and II, demand incentives for electric two-wheelers have been raised from Rs 10,000 per kWh to Rs 15,000 per kWh.

The government has approved Rs 18,100 crore worth production-linked incentive (PLI) scheme for investment in advanced chemistry cell (ACC) battery manufacturing. It has also approved Rs 26,058 crore for automotive manufacturing focusing on EVs and hydrogen fuel cell vehicles.

One of the sectors that can directly benefit from adoption of EVs is the gig workers segment. E-commerce companies like Amazon, Capgemini, Dalmia Cement and Zomate made new commitments to achieve 100 per cent electrification of their fleets in the country between 2030-2040.

Besides, companies like Ashok Leyland, Mahindra & Mahindra, Omega Seiki Mobility, Simple Energy and Tata Motors have announced that they will invest a total over Rs 48,000 crore in EVs, components and battery manufacturing.

However, even after this obtaining adequate finance remains a challenge for manufacturers.

Low liquidity a challenge

The Niti Aayog report states that retail lending to support consumers and institutions in financing EVs has been slow to pick up.

"Financial institutions have not yet increased lending to the level that would be required—an estimated Rs 40,000 crore ($5 billion) by 2025 and Rs 3.7 lakh crore ($50 billion) by 2030," it said.

This is the situation even when public and private investments and government initiatives towards India's EV dreams are accelerating capital deployment.

The report said that banks and financial institutions are still wary of lending to EVs due to the associated asset and business model risks, given that the sector is still in its nascent stage.

"India is witnessing a very unique growth model for clean mobility with the adoption being built ground-up. However, the infrastructure to support this ecosystem is still at a nascent stage. There are several crucial factors that are inhibiting the growth, and need an inclusive approach, at the central and state level," Krishna K Jasti, co- founder and CEO of EVRE said.

Hence, EV makers often need to deal with challenges like high interest rates (almost 2 times that of petrol vehicles), low loan to value ration, tenure of loans shorter than ICE vehicles leading to higher equated monthly instalments (EMIs) and limited financing options.

Even though the government has introduced several measures like FAME - I & II, production-linked incentive (PLI) schemes and more, the country's realisation of EV dreams still seems to be far-fetched with major challenges yet to receive a solution.

“The Fame-1, Fame-2 & PLI policies are steps in the right direction for the promotion of electric vehicles, but if we require the industry to grow and match the scale of the already existing automobile industry, the need is for many more such policies and manufacturing incentives for domestic component manufacturing by the central and state governments,” Rishabh Ahuja, director of Ingar Electronics said.

Countries like Australia, UK and the US are also addressing the matter of climate change through adoption of EVs and have adopted several initiatives to provide adequate financing to the makers.

“EVs around the world have been subsidized and promoted into the mainstream by every major economy. The primary reason for the EV boom in China was the heavy subsidies offered by the government,” Ahuja added.

The Indian industry, however, is keenly looking forward to the implementation of first-loss risk-sharing instrument by Niti Aayog and the World Bank.

The program is expected to act as a hedging and guaranteeing mechanism that banks and NBFCs can access in the event of payment delays on EV loans. It will also help in bringing down financing costs by 10 to 12 per cent.

"This availability of credit will greatly enhance liquidity for EVs. Simultaneously, there is a need for complementary regulatory measures that support the risk-sharing instrument and provide an incentive for FIs to finance EVs," the report said.

Role of NBFCs will be important to expanding financing for EVs due to several factors. First, the vehicle finance market share of NBFCs has been increasing over the past 5 years. In 2016, NBFCs accounted for 43 per cent of the formal vehicle financing market. By 2020, it had surpassed banks to account for 52 per cent of market share.

Besides, NBFCs have a higher risk appetite and provide smaller pools of finance, many times in non-metropolitan areas.

However, NBFCs have been facing a liquidity crunch since 2017 that has been worsened by the effects of Covid-19.

Scheduled commercial banks (SCBs) had Rs 36 lakh crore in outstanding priority sector credit. A large portion of this arose from sectors with mandatory sub-targets (agriculture, microenterprises, advances to weaker sections).

Will priority sector lending help

Another measure that is widely being anticipated by the industry is inclusion in Reserve Bank of India's (RBI) priority sector lending. The move, if made, is said to have the potential to institutionalise the role of finance in India's transition to EVs.

The PSL guidelines were introduced by RBI in 1972 to expand financial access to vulnerable sections by enhancing credit for 'priority' sectors having the potential to generate large scale employment, but have low bankability.

As per the guidelines, scheduled commercial banks are mandated to allocate specific levels of bank credit towards priority sectors.

At present, the list of priority sectors include agriculture, MSMEs, housing, renewable energy, education, social infrastructure, export credit, self-help groups, startups and weaker sections of society.

Banks lend about 40 per cent of their adjusted net bank credit to these priority sectors, with the biggest share of 18 per cent being going to agriculture.

As of December 2020, priority sector lending for scheduled commercial banks stood at 40.54 per cent for FY 2020-21.

The Niti Aayog report showed how PSL inclusion has proved beneficial for various sectors. Prior to its adoption, the agriculture sector received 71 per cent of agricultural credit from informal moneylenders and 4 per cent from commercial banks. However, in 3 decades of PSL, the share of credit from moneylenders has reduced to 31 per cent, while that from commercial banks has jumped to 52 per cent.

Besides, data by RBI shows that priority sector non-performing assets (NPAs) declined from 51 per cent in 2020 to 27 per cent in 2019.

In 2019, public sector banks led by State Bank of India (SBI) had requested priority sector recognition for retail lending to EVs. However, a decision is still awaited.

EVs becoming more economical for certain sectors

Reforms introduced by the government are gradually making EVs more economical than ICE vehicles on a total cost of ownership (TCO) basis for several segments.

Take the case of a gig worker, a rider making food deliveries on a regular basis. Hypothetically, lets consider that the rider makes Rs 20,000-24,000 a month. To achieve this, they spend somewhere between Rs 7,000-9,000 per month for bike EMIs, maintenance and fuel. With rising fuel costs, their income reduces further.

For example, a delivery worker rides for 80 km per day, which equals to 2,000 km per Month. With petrol being at Rs 105.41 per litre in Delhi, their fuel expenditure is approximately Rs 5,000 per month.

In case of Mumbai, where petrol costs Rs 120 per litre, the fuel expenditure jumps to Rs 6,000 per month. This clearly shows a difference of Rs 1,000 in their take home pays across cities.

With EVs, this rider can increase his take home income by up to 30 per cent.

"Going forward deliveries on EVs will actually reduce the cost for companies on a per delivery basis as in the long term Zomato, Swiggy or other companies will reduce the payouts for gig workers, which will reduce their respective per delivery cost," said Anubhav Sharma, co-founder and CEO of Baaz Bikes.

If the Centre makes EVs mandatory for the delivery workers it will increase their costs in the short-run as it might lead to shortage of workers since many do not have EVs at present. However, with adequate measures from the Centre, the companies will be able to shift their fleet to electric in a phased manner, Sharma added.

However, the upfront cost still poses a barrier.

Infrastructure continues to be a challenge

To enable India's EV dream, an accessible and robust network of charging infrastructure is an essential prerequisite. Even though the Centre has implemented various policies to promote the development of charging infrastructure, there is a need to support its on-ground expansion.

"The government needs to create a conducive environment for development of the infrastructure for the EV industry to thrive. This is extremely crucial with the increased number of EVs on Indian roads, which is creating an insatiable demand for Li-ion batteries," Samrath Kochar, founder & CEO of Trontek said.

Kochar further believes that the government needs to formulate a policy for EV charging infrastructure and mandate it in line with its business viability and utility at the same time.

Charging requirements depend on the specifications of EV batteries, as power must be supplied to the battery at the right voltage and current levels to permit charging.

"There has to be more support to enable creation of charging infrastructure by private companies, which will in turn enable large scale adoption of EVs. The announcement on battery policy including battery swapping and charging infrastructure will definitely give rise to battery-as-a-service (BaaS) or energy-as-a-service (EaaS) business verticals in electric mobility segments,” EVRE founder Krishna K Jasti said.

Roadmap to 2030

To bring the cost of EVs at par with petrol vehicles, the government under the Faster Adoption and Manufacturing of (Hybrid) Electric Vehicles in India (FAME India) Scheme supported by way of demand incentives, is constantly evolving its measures as per need.

According to a release by ministry of heavy electrics, 520 charging stations were sanctioned under the phase-I of FAME India scheme, out of which 452 stations were installed as of December 2021.

The scheme was launched in 2015 to promote adoption of electric/ hybrid vehicles (xEVs) in the country.

At present, phase-II of FAME India scheme is being implemented for a period of 5 years from April 1, 2019 with a total budgetary support of Rs 10,000 crore. This phase focuses on supporting electrification of public & shared transportation and aims to support, through subsidies, 7,090 e-buses, 5 lakh e-3 wheelers, 55,000 e-4 wheeler passenger cars and 10 lakh e-2 wheelers.

In terms of infrastructure, under phase-II, the government sanctioned 2,877 charging stations in 68 cities across 25 states/UTs. Further, 1,576 EV charging stations were sanctioned across 16 highways & 9 expressways under this phase.

Last week, the Niti Aayog introduced draft battery swapping policy for electric vehicles and suggested incentives as well as a rigorous testing protocol for swappable batteries. The draft assumes significance amid concerns over safety of electric vehicles in the wake of multiple instances of such vehicles catching fire.

The draft said all major cities such as state capitals, UT headquarters and cities with population above 5 lakh will be covered under the second phase, given the importance of the two-wheeler and three-wheeler vehicle segments in growing cities. It seeks a level playing field across business models involving the sale of EVs with fixed or swappable batteries.

Further, guidelines released by the government as of March 2022 require at least one charging station at every 25 kms on both sides of the highway and also at least one for long range/heavy duty EVs at every 100 kms on both sides of the highway.

For the city, at least 1 charging station is needed to be set up in a grid of 3km x 3km.

A budget provision of Rs 1,000 crore has been earmarked for a period of 5 years (2019-20 to 2023-24) for establishment of charging infrastructure under phase-II of FAME India Scheme.

Besides, the PLI scheme for automobile and auto component industry has been successful in attracting proposed investment of Rs 74,850 crore against the target estimate of investment Rs 42,500 crore over a period of 5 years.

The running cost of EV’s is a fraction of their inter combustion counterparts, owing to the low cost of electricity as compared to petrol and very low maintenance costs. This makes them naturally suited to Indian’s demands and especially if the costs of their ICE counterparts are comparable.

Total 95 applicants have been approved under the PLI scheme, the ministry had earlier approved 20 applicants (along with their 12 subsidiaries) for champion OEM incentive scheme.

Even so, its still a long road ahead for transition to EVs. Apart from easing financing norms for manufacturers, priority also needs to be given to other aspects like infrastructure.

"PSL inclusion solves a lot of business funding problems for OEM’s, but things dealt with on a state level rather than a central level such as land allotment, labor skill development, consumer subsidies need to be given priority," director of Ingar Electronics Rachna Ahuja said.

The government has already involved private and public agencies like NTPC, Energy Efficiency Services Limited, Power Grid to name a few.

From the perspective of EV owners, the Centre has enabled them to charge vehicles at their residences or offices using their existing electricity connections. A revenue sharing model has also been suggested for land use to make public charging stations financially viable from an operational perspective.

Even oil marketing companies (OMCs) have announced setting up of 22,000 EV charging stations in prominent cities and highways. Out of these, 10,000 will be installed by Indian Oil Corporation (IOC), 7,000 by Bharat Petroleum Corporation Limited (BPCL) and remaining 5,000 by Hindustan Petroleum Corporation Limited (HPCL).

Efforts are being made by the Centre to made the transition to EVs an easier process. At the moment, 3Is seem important - incentives, investment and innovation.

Therefore, creating an enabling environment for EV adoption will be key to India's development goals. It will also support India's ambition to de-carbonise vehicle stock, aligning with its target of net-zero emissions by 2070.