In an ambitious effort to reduce its dependence on oil and cut its greenhouse gas emissions, India has announced a plan to have almost all of the cars on the country’s roads be electric by 2030. Given that India is expected to see oil demand grow by the sharpest rate in the world over the next two and a half decades, this news is very positive. However, even though India’s initiative will bring important reforms, it will likely fall short of its goals. While the country is making a concerted effort to implement reform in its transportation sector, it is far behind other countries in putting EVs on the road.
While India is making a concerted effort to implement reform in its transportation sector, it is far behind other countries in putting EVs on the road.
“India can become the first country of its size which will run 100 percent electric vehicles,” Power Minister Piyush Goyal said in March.
To boost sales of EVs, the government is implementing a new tax structure in July with a 12 percent tax on EVs, compared to about 28 percent tax on small cars that run on petroleum products. Oddly, though, there will be a 43 percent tax on plug-in hybrids.
The favorable EV tax structure may not be enough. For one, domestic automakers are far behind the curve in producing and selling large amounts of EVs. As of now, only one car company, Mahindra & Mahindra, is making EVs, and it is dealing with low sales. Automakers such as Toyota, Nissan, and Hyundai were planning on selling hybrids in India, which could accelerate a transition to fully electric cars, but the forthcoming high tax rate has stifled these plans. Toyota said the Indian government was “short-sighted” with its tax rate for hybrids.
Oil demand set to double
In order to reach its goal, the IEA told Bloomberg, India would need some 10 million EVs on the road by then. That compares to more than 2 million plug-in hybrids and EVs across the world right now, and a mere 22,000 sold in India over the last year or so. Not only would India need to produce or import such a large number of EVs; it would also need to build a mammoth charging network in both urban and rural areas. Tata Motors said, “The charging infrastructure needed (for full EVs) does not exist.” Indeed, the country is notorious for infrastructural deficiencies, struggling with frequent transmission bottlenecks and power outages. At the end of 2015, India had only 328 EV chargers nationwide. That compares to some 28,000 in the U.S. and 47,000 in China at the same time.
“The charging infrastructure needed (for full EVs) does not exist.”
Late last year, in its World Energy Outlook, the IEA said Indian oil demand would more than double between now and 2040 to average just under 10 million barrels per day (mbd). India’s oil demand has been growing at healthy clips and is expected to average 4.5 mbd this year, up by 1 mbd in just the past five years. The IEA’s forecast assumes a target of 200,000 to 400,000 EVs by 2020, an ambitious goal on its own, but still well short of the recently announced initiative. Even if India, which relies heavily on Middle East crude oil imports, were to meet its target, it would reduce oil demand by only 10 percent down to 9 mbd. Against this backdrop, oil demand still doubles, driven in large part by petchem, trucking, popular two-wheeled motorcycles, and the gasoline-powered vehicles that will remain on the roads before being replaced by EVs.
More Indians will buy cars in the coming decades
An overwhelming majority of Indians use mass transportation, bicycles, or three-wheeled vehicles to travel, but that could change as incomes rise.
There is a lot of upside potential for vehicle ownership in the country, providing a big opportunity to move to EVs. But the growth in private ownership also underscores why oil demand is forecast to rise sharply. According to the International Monetary Fund (IMF), India’s GDP is set to increase by more than 7 percent both this year and next as a result of important structural reforms put in place, a heavy focus on industrial activity, and changes in fiscal and monetary policies. Even though growth will eventually slow, it will remain the highest in the world. With a strengthening economy, more of the country’s 1.3 billion citizens will move from low to middle incomes. An overwhelming majority of Indians use mass transportation, bicycles, or three-wheeled vehicles to travel, but that could change as incomes rise. The growth in vehicles in India has already been exploding; in the past decade and a half, the number has risen from just above 55 million in 2001 to 210 million in 2015.
Even though India’s population mostly matches China’s and GDP growth is now stronger, India will not leapfrog its Asian neighbor in the volumes of petroleum consumed. Currently, oil consumption in India is 1.1 barrels per capita, the IEA estimates, roughly a third of levels seen in China, a reflection of the large upside potential for India. The IEA’s projected pace of demand growth in India over the next 15 years is weaker than the trend that China experienced over the past decade and a half. The smaller increases stem from GDP growth expected to slow over time and car ownership by 2030 to be 20 percent lower than China’s current levels. That reflects India’s continued reliance on mass transit even as more of its citizenry shift to private car ownership.
Overall oil demand in India will still rise despite the government’s best intentions, if only because the population is booming and moving into the middle class.
Even though India’s appetite for oil won’t exceed China’s, New Delhi has a daunting challenge ahead. It must meet its voracious energy needs while also acknowledging its environmental goals and its commitment to reducing oil dependence. While India’s goals are laudable, the process of moving an entire country and its citizens away from petroleum is far from an easy one. Low oil prices weaken the motivation to move toward alternatives. Other roadblocks include the costs of EVs being higher than the price of cars with internal combustion engines and the dearth of proper infrastructure that could reduce consumers’ “range anxiety” and bolster consumer confidence. India, given the forecasts for oil demand and economic growth, will be a key player in the global oil market for decades to come. Overall oil demand will still rise despite the government’s best intentions, if only because the population is booming and moving into the middle class.