Deepak Rajagopal and Badri Narayanan Gopalakrishnan
Improved balance of trade is expected due to India’s extreme reliance on oil imports (over $110 billion), which can be reduced by EVs. One can argue that this advantage is heavily undermined due to the ongoing free fall of oil prices, but this fall may not sustain in the medium to long term when the economies recover.
But first let us get some basic incontrovertible facts out of the way. One is that EVs unambiguously contribute to improving air quality simply because, unlike gasoline and diesel vehicles, they do not entail emissions at their point of use.
Another related yet different fact is that while electricity derived from solar and wind maximizes the greenhouse gas (that are responsible for global warming) benefits of EVs, even when powered with coal-based electricity, EVs can help reduce greenhouse house gas emissions that are responsible for global warming. A third more nuanced fact is that at high levels of vehicle utilization (kilometers per day of vehicle use), the fuel and maintenance cost savings loom large enough that it becomes worthwhile to adopt EVs purely for their private economic benefits.
Since environmental quality is a common good it is rational for private firms and individuals to not value them and free ride on others’ actions.
Finally, policymakers deserve credit for the policies that do exist in India today, the single biggest among which is Faster Adoption and Manufacturing of Electric Vehicles II (FAME II), a Rs. 10,000 crore mission adopted earlier this year.
While imperfect, a salient and heartening aspect of FAME II is that public transport buses account for the largest share of subsidies followed by two and three wheelers with that for private four-wheelers accounting for a small portion of the overall budget.
Furthermore, with regard to buses, an attempt has been made to incentivize ensuring their high utilization to maximize their economic and environmental benefits. Collectively, it appears both equity and efficiency have been taken seriously in the design of FAME II.
As to how the implementation pans out and what are the outcomes remains to be seen.
Yet, there are legitimate concerns as to what a switch to EVs means for the competitiveness of the domestic auto sector, on employment, and on balance of trade, which are the focus here. Indeed, there also are purely technological questions such as battery performance and degradation under different operating conditions (say, extreme temperatures) and charging conditions (ultra-fast charging) but those are not pertinent to the economic concerns in focus here.
The battery pack alone accounts for around 40% of the life cycle ownership cost of an electric car (this includes the cost of a one-time complete battery replacement across the life of the vehicle).
As things stand, the value of embodied battery imports across the life of an EV exceeds the value of imports embodied in petrol (or diesel) consumption over the same fixed life of an internal combustion engine (ICE) vehicle.
Therefore, without domestic production of batteries we not only risk shrinking the domestic auto-sector but also a worsening the balance of trade. Battery cost is followed by the cost associated with electricity consumption which accounts for about 25% of the total cost of ownership.
If anything, the displacement of domestic coal with imported solar panels while it makes EVs more environment friendly is also likely to accentuate the negative impact on trade balance. But the location of battery manufacturing appears the single most important factor in determining the net impact on trade.
Implications on Jobs
With respect to employment, one would expect a reduction in jobs in those industries that face decline in demand and an increase in those that face growth in demand.
We find that the reduction in jobs associated with engine and other ICE components and oil refining exceeds the increase in EV components, electricity production and the manufacturing and installation of. charging equipment and stations.
So, it appears that the net effect on jobs in the absence of domestic battery production is a likely decline. However, this is before we account for the fact that the aggregate cost savings to the consumer from switching to EVs frees up income that will spur additional consumption.
The jobs that would provide for this additional consumption more than offsets the net reduction in jobs that would result without these savings.
While there seems to exist a strong government desire to establish a domestic EV battery industry, one cannot say the same about the strategy in place.
India does not hold a competitive advantage in battery manufacturing. So, it is hard to see how this can be brought about without a combination of guaranteed minimum domestic demand for batteries coupled with strong incentives (tax subsidies) for domestic investment or disincentives on imports (through tariffs) or both.
Without a doubt, these policies increase the cost of consuming EVs today, but it might well be the price the Indian consumer needs to pay if India is to help establish a new domestic industry.
Indeed, trade restrictions are at odds with textbook and neoclassical economic principles. But while they are of course inefficient in a static sense, the dynamic effects are more complex and appear not to be entirely negative for there are many instances where they seemed to have helped the domestic industry achieve international competitiveness or at a minimum contribute to domestic growth.
Indeed, the global prowess of India’s auto manufacturing is partially attributable to such policies. So, while it is hard to argue for such government interventions to be in effect indefinitely, they have merit if the goal is to help set an infant domestic industry on a trajectory towards future global competitiveness.
A good place to look for sound arguments in support of learning-related benefits of trade restrictions or state-led capitalism is the book titled Creating a Learning Society by professors Joseph E. Stiglitz (winner of Nobel Memorial Prize in Economics 2001) and Bruce C. Greenwald (© 2015 Columbia University Press) and the references therein.
Therefore, a singular gap in the EV policy ecosystem today is the lack of guaranteed domestic demand for EVs. This is directly addressed through a mandate that requires a certain share of annual auto sales be composed of EVs by a certain date, say 10% each year starting the year 2025.
A specific example of such a mandate is the US State of California’s (CA) Zero Emissions Vehicle (ZEV) mandate which set a target of 5 million ZEVs to be sold within the state by 2030 and requires the creation of 250,000 electric vehicle charging stations by 2025.
Why look across the pacific when we can simply look over our shoulder to China whose New Energy Vehicle mandates requires 10% of the conventional passenger vehicle market in 2019 and 12% in 2020 to be non-ICE vehicles.
But here the comparisons need to stop for China secured competitive advantage in EV battery manufacturing including cell manufacturing thanks to visionary, strategic and long-standing investments and subsidies that it put in place more than a decade ago, the benefits of which it is reaping today.
The same is true with manufacturing solar photovoltaic cells and innumerable other electronics and industrial goods in general that China has assumed pole position globally. India therefore needs strong policies to ensure that battery cells are made in India as opposed simply battery pack assembly.
The importance of high vehicle use. Since the aggregate economic and environmental benefits also become less substantial at lower levels of usage one cannot over-state its importance to the macroeconomics.
Today EVs make financial sense (i.e., without valuing environmental and public benefits) only at vehicle usage levels exceeding 100 kms per day (ideally even higher at close to 150 km/day) which is way higher relative to the daily usage for the average private household car in India.
While most public transport buses, private long-distance buses and long-haul trucks satisfy this criterion, when it comes to cars the ripe targets are the large taxi fleet aggregators including but not limited to Uber and Olacabs, and other taxicab fleets. A simple straightforward way to ensure EVs are first adopted by the high usage vehicles is via a mandate on large commercial fleets such as Uber, Olacabs, and other large taxicab aggregators to infuse EVs synchronously with the mandate on automakers.
A third less important recommendation that follows naturally is for more focus on creating a robust charging infrastructure to support transport electrification of high usage vehicles.
Detailed studies simulating the performance and economics of electrifying on-demand taxi vehicles (supported by peer-reviewed publications including those by this author) show that electrification of taxi fleets can be achieved with little or no increase in the cost of service provision given the right charging infrastructure and given sufficient utilization of this infrastructure.
Such studies also suggest reducing public expenditure on vehicle subsidies and redirecting those funds to support the creation of a robust charging infrastructure is a better strategy. Such an approach is likely to also reduce industry resistance electric vehicle mandates.
To reiterate, a key missing element in the EV policy ecosystem is the absence of a strong driver for the auto industry to both invest in EVs and to invest in domestic battery manufacturing. This is simply addressed through a mandate for infusion of EVs, and conditioning compliance with mandate on meeting a certain share of those sales with domestically manufactured batteries. Even any incentives and subsidies could be conditioned on achieving a given domestic battery content target by each obligated firm.
The ongoing cuts in interest rates by the RBI as well as central banks across the world in the light of Covid may also prove to be useful to infuse some much-needed capital in this area.
Furthermore, the ongoing return of laborers to their native places, coupled with actions taken by the less developed states to attract capital may result in a much needed eco-system across the country in terms of a robust and cost-effective supply chain with rich human capital. A second essential element we need is a mechanism to target high usage vehicles.
Ensuring this in the case of the four-wheeler car segment means to complement the mandate on automakers with a mandate Uber, Olacabs, and other large taxicab operators to infuse EV.
An important detail in this recommendation is the phrase “gradual infusion” for we are neither tone deaf nor insensitive to the current economic realities.
Nevertheless, if we are serious about keeping the auto sector competitive in the long run, we need bold and sustained efforts similar to the one that lead to India becoming the global auto power house that it is today.
To that end, we need a well thought out plan for establishing a thriving domestic EV industry that harnesses the potential for employment, domestic value addition and pollution reduction to the optimal extent.
This article was originally published in auto.economictimes.indiatimes.com