India’s Narendra Modi is reportedly considering cutting import duties for electric vehicles in a bid to attract a major multibillion-dollar investment by Tesla CEO Elon Musk.
For years, the two have wrestled over the prerequisites for his carmaker to enter the market, with the entrepreneur asking that the tariffs, which can as much as double the price of his cars, be substantially reduced. New Delhi countered by requesting he first commit to local production, setting up a high-stakes game of chicken.
Ahead of an expected meeting this week between Musk and the country’s commerce minister, Piyush Goyal, it looks as if the two are finally coming closer to finding common ground through a reduction that might benefit all EV manufacturers, not just Tesla.
“We want to create a package which is good for India and which doesn’t become a curated package for one company,” the paper quoted an official as saying, suggesting a 15% flat duty regardless of an EV’s price. Currently it tacks on an extra 70% for cars below $40,000 and 100% for those above that threshold.
India’s car market has enjoyed robust growth in recent years, first overtaking Germany in 2021 as the world’s fourth largest before edging out Japan last year for the third spot. If Tesla wants to have any hope of selling 20 million EVs annually in 2030, it will need a large pool of potential buyers like India’s to help drive this tenfold-plus increase from this year’s predicted volume.
Meanwhile, India could benefit greatly from EVs that eliminate lower tailpipe emissions. Cities like New Delhi regularly rank among the worst in the world when it comes to air pollution, thanks to its diesel-heavy vehicle fleet and reliance on coal-fired power plants.
Great meeting you today @elonmusk! We had multifaceted conversations on issues ranging from energy to spirituality. Https://t.co/r0mzwNbTyNpic.twitter.com/IVwOy5SlMV
— Narendra Modi (@narendramodi) June 21, 2023
Landing a prestigious investment like a Tesla would be a major feather in the crown of Modi. The economic reformer from the Hindu nationalist BJP party faces off against the Congress party next spring in a general election for control over parliament.
Poor profits and regulatory headaches long stifled growth
However, India is not a silver-bullet solution. As attractive as its market is in terms of size, its structural hurdles make it a challenging one. Even as India has eclipsed China in terms of the sheer number of potential consumers, purchasing power remains weak, and the infrastructure, including roads and highways, is still woefully underdeveloped by comparison.
Dozens of carmakers have fought for years over the scraps left over by Maruti Suzuki, the dominant player that accounts for roughly every second car sold, and its smaller rival Hyundai, the number two with about a 15% share. Given the brutal competition over the remaining one-third of the pie remaining, profits are razor-thin at best.
Exacerbating this competition is the added issue that, unlike in China where lucrative large sedans and SUVs are preferred, the bulk of cars sold in India measure no more than the length of a BMW Mini. And in the auto industry, the smaller the car, the lower the profits.
That means most automakers have to use India as an export hub just to keep plants running. Volkswagen, for example, built the subcompact Vento sedan in Pune, in the Indian state of Maharashtra, and shipped them halfway around the world to sell in Mexico. Others like General Motors have simply opted to exit such a difficult market entirely.
India’s economic growth has also suffered from a byzantine tariff system that included the octroi, a tax on goods entering a city from the days of medieval France. Extra precautions had to be taken, for example, to ensure VW cars built in Pune for the domestic market were loaded straight onto trains without touching solid ground lest duties be due. The octroi was finally abolished in 2017 as part of Modi’s signature GST reform on goods and services tax.