India’s EV sector is well poised to yield returns commensurate with increased credit supply, thanks to an enabling policy regime covering large-scaling manufacturing, robust charging networks, mass adoption, and end-of-life management.
The electric mobility revolution in India is an inflection point in the country’s decarbonisation journey. Our climate goal of cutting emissions to net zero by 2070 — announced at COP26 — necessitates a complete and urgent overhaul of the energy-guzzling internal combustion engine (ICE) sector, among others. The ICE sector emits 337 Mt of Co2 a year, much of which is from trucks (39 percent), followed by two- and three-wheelers (17 percent), and cars (17 percent) – the modes whose electric and other low-carbon variants are gaining currency today. But this transition to a zero-emission future is not cheap. India, thus, needs innovative and sustainable solutions to finance its e-mobility revolution.
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NITI Aayog estimates that India would need a capital of Rs 19.7 lakh crore or $266 billion to electrify 70 percent of its new vehicle sales by 2030. This is the cumulative cost of investing in Electric Vehicles (EVs), EV supply equipment, and batteries. A crucial instrument that is effective at redirecting investment flows from high- to low-carbon technologies is priority sector lending (PSL).
Introduced in 1966-’68, formalised in 1972, and realigned in 2016 PSL corrects credit availability and growth imbalances in strategic sectors of the economy, such as agriculture, micro-small-medium enterprises (MSME), exports, education, housing, social infrastructure, renewable energy, and others. Thus, sectors of national importance are assigned priority for development, and financed by the banking system regarded as the cornerstone of India’s inclusive economic growth.
Electric mobility is one such sector of national importance. Its potential to enhance energy security, reduce our reliance on imported fossil fuel, foster innovation and entrepreneurship, unlock jobs in the millions, and improve India's global competitiveness, demands that it makes it to the priority list.
In fact, India’s EV agenda perfectly fits the mandate of PSL. The Internal Working Group of the Reserve Bank of India (RBI) , tasked to revisit PSL targets and classification, noted in 2015 that the changing times warranted a realignment of the priority sectors with emerging national priorities and financial inclusion goals of the country. Thus, the emphasis expanded from lending to vulnerable sections to also covering sectors which “increase employability, create basic infrastructure and improve competitiveness of the economy, thus creating more jobs”. The result is the eight new priority sectors India has today.
While sectors like agriculture, exports, and micro and small enterprises were retained, emerging priorities such as medium enterprises in manufacturing and services industries, social infrastructure, and renewable energy were added to the list. The new sectors were identified based on their potential for livelihood generation, strengthening socio-economic equity, and creating a conducive infrastructure for improving the absorptive capacity of credit.
Therefore, the success of PSL or directed lending lies in how well a sector is able to capitalise on credit infusion and grow. Consider the role of PSL at effectively scaling micro- and small enterprises (MSE), and exports in India in the first decade of the 21st century. Between 2001 and 2011, PSL increased at a CAGR of 23 percent and 20 percent respectively for MSE and export sectors with the sectors successfully leveraging the increased supply of credit to grow. Notably, a 100 percent increase in PSL to exports and MSE increases the export GDP by 76 percent and manufacturing GDP by 41 percent, respectively. Such impact if not higher is envisaged for the e-mobility sector as well.
Today, India’s EV sector is well poised to yield returns commensurate with increased credit supply, thanks to an enabling policy regime covering large-scaling manufacturing, robust charging networks, mass adoption, and end-of-life management. There is an accelerated adoption of electric buses, and two-, three-, and four-wheelers, due to high fuel prices, regulatory push, and purchase incentives, among others. FAME II — now extended till 2024 — alone has a corpus of Rs 9,000 crores for demand subsidies.
On their part, Lithium-ion battery manufacturing is picking pace, with many new-age as well as traditional chemicals companies taking advantage of Rs 18,000 crore worth government subsidies, and building integrated businesses including cell manufacturing, battery recycling, and battery production. Using the FAME II corpus of Rs 1,000 crores, the government is planning to install 70,000 EV chargers across India, while also leveraging the dense network of petrol pumps in the country. Oil companies, energy operators, and cities are partnering to create robust charging infrastructure.
Furthermore, companies dealing with commodities, auto ancillaries, software (R&D), and polyester film packaging, etc. are all realigning their business models to suit an EV future. While these are steps in the right direction, public and private funds available constitute only a fraction of the financing needs of the country.
There is no denying that the EV sector is still in its nascent stage. On the one hand, the impetus for mass adoption of EVs is immense with FAME subsidies, production-linked incentive (PLI) schemes for large-scale battery manufacturing, 20+ states notifying EV policies, and building robust charging networks and manufacturing of world-class EVs in full swing in India. On the other, EVs form around 2 percent of the total vehicles sold in the country. Priority lending will help India achieve its e-mobility goals and more.
Policy consistency and political vision and will — signalling a demand for EVs - are important to de-risk investments and make PSL for EVs successful. De-risking involves decreasing the downside of low-carbon investments.
Complicated permitting process causing construction delays, default in payment by customer, etc. influence investors’ decisions, driving up cost of debt (interest rates), and cost of equity. While downside risk and associated financing costs are common for both fossil fuel and EV projects, they are more significant for low-carbon initiatives since they are capital-intensive. Thus, de-risking through policy measures such as removing barriers in the investment environment, and improving local institutions will go a long way.
Additionally, financial de-risking could be undertaken by transferring large portions of the impact to development banks (among others) who cover damages such as reduced or non-payment of the customer. Lastly, India can leverage its Jan-Aadhaar-Mobile trinity, to further de-risk PSL, ensure credit reaches the intended beneficiaries, and improve India’s credit culture.
Overall, PSL — set at 40 percent of Adjusted Net Bank Credit or Credit Equivalent Amount Off-Balance Sheet Exposure (whichever is higher) for commercial banks, and 75 percent for regional rural banks and small finance banks — must be expanded to cover the emerging sector of electric mobility. Surging awareness and demand, accelerated adoption, potential to positively impact forex-jobs-GDP, and sufficient policy and regulatory impetus are enabling the EV sector to grow. Combined with credit infusion through PSL, India’s leapfrog to a global EV hub is inevitable.
—Aishwarya Raman is Director and Head of Research, Ola Mobility Institute. Views expressed are personal
(Edited by : Ajay Vaishnav)