India’s infrastructure landscape has evolved significantly, with investment patterns shifting to accommodate emerging sectors alongside traditional ones. Previously, the majority of available capital was directed towards energy sub sectors such as solar and wind energy. However, in recent years, the funding landscape has expanded, supporting the rise of electric vehicles (EVs), a critical and timely development for India.
The long-term sustainability of the Indian economy is at risk if heavy reliance on fossil fuel-intensive mobility continues. In view of this, there has been a strategic shift towards the decarbonisation of the transportation sector. India has set an ambitious target of increasing the share of EV sales to 30 per cent for private cars, 70 per cent for commercial vehicles, 40 per cent for buses, and 80 per cent for two-wheelers and three-wheelers by 2030. To achieve this, it needs to harness its present momentum and secure its market position.
Factors like the urgent need for sustainable transportation, a conducive policy environment and ambitious national targets have cast a spotlight on the untapped potential of the Indian EV market, creating a compelling value proposition for investors. As a result, the sector has attracted considerable attention with different buyer classes vying to stake their claim, further validating the sector’s growth story.
Regulatory impetus driving investments
The current investment climate has been supported by a comprehensive suite of regulatory moves including tax incentives, production-linked incentive (PLI) schemes, fiscal incentives to promote domestic manufacturing, the New Electric Vehicles policy under which customs duty on imported electric cars is reduced from 70 per cent to 15 per cent, allowance of foreign direct investment, and grants and subsidies to encourage the development of charging infrastructure. Collectively, the policy initiatives have created a conducive ecosystem for investments.
Under the Union Budget 2024-25, the introduction of the Electric Mobility Promotion Scheme, coupled with a substantial increase in funding for the PLI scheme, signifies a strategic shift towards reducing reliance on direct subsidies. Additionally, the allocation for the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme has been reduced by around 50 per cent to Rs 26.71 billion. Select companies have been found flouting the scheme’s procurement norms, prompting government scrutiny. This may potentially erode investor confidence in the short term. Consequently, industry hopes are now banking on the soon-to-be-launched FAME III scheme for a renewed green mobility plan.
Another key policy development is the launch of the Critical Mineral Mission and introduction of complete customs duty exemptions on 25 critical minerals, including lithium and cobalt. This move towards resource security is particularly timely, coinciding with the recent discovery of lithium reserves in Karnataka and Jammu & Kashmir.
Further, as per media reports, battery costs have plummeted by nearly 90 per cent, bringing EVs closer to cost parity with internal combustion engine (ICE) vehicles, a key development considering cost viability is crucial for consumers.
Institutional investors bet big
Overall, the Indian EV space is experiencing a surge in investment from a diverse range of buyers. This can be attributed to the meteoric rise of EV start-ups. As per NITI Aayog, the number of start-ups across the EV value chain has jumped up from 15 in 2012 to 1,883 in 2023, creating potential funding opportunities. Some of the recognised start-ups are Recykal, LOHUM, Sea6 Energy, EVage Ventures, Kabira Mobility, Batx Energies, Newtrace and Alt Mobility.
In the two-wheeler EV market, companies like Ola Electric, Ather Energy and Ampere Vehicles have established strong positions. As a new entrant in the secondary market, Ola Electric’s IPO has soared 70 per cent from its listing price of Rs 76, resulting in a market cap of Rs 510 billion. The start-ups focusing on battery swapping and charging infrastructure have also secured substantial funding. These include Battery Smart ($65 million), ElectricPe ($8.29 million), Turno ($6 million), RACEnergy ($3 million) and Metastable Materials (undisclosed).
A wide range of investors are bullish on new EV opportunities, vying to claim their share of the EV pie. Various funding rounds have seen participation from family offices like the Haran family office, Vasavi family office and Desai Family office as well as venture capitals (VCs) like Green Frontier Capital, Micelio Fund, Blume Ventures, Blumehill Capital, and Lightspeed.
The investment trend is not limited to start-ups as legacy automotive companies have also attracted significant foreign funding. While most VCs have favoured start-ups, private equity funds have leaned towards funding established original equipment manufacturers. For instance, British International Investment recently committed $250 million to Mahindra & Mahindra’s four-wheeler EV division. Meanwhile, Pure EV, a Hyderabad-based EV manufacturer, recently raised around $8 million to help expand its sales from 140 dealers to 300 dealers in the next six months. BluSmart raised around $24 million to expand operations, and Perpetuity Capital, an EV financing start-up, raised Rs 70 million via non-convertible debentures (NCDs) from N+1 Capital and RevX Capital.
Furthermore, as per the Ministry of Commerce and Industry, by 2030, the country is set to further attract foreign investments worth about $20 billion in the clean mobility space with a focus on EVs.
EV borrowing hurdles
EV loans come with hefty price tags – sky-high interest rates and short tenors–making them less favourable for end borrowers. Commercial banks are playing it safe, largely steering clear of the new-to-credit borrowers who make up the bulk of the two- and three-wheeler market, as well as the new-age mobility start-ups that are still finding their financial footing. Non-banking financial companies (NBFCs) are better equipped to handle these high-risk borrowers. However, they come with their own challenges such as steep borrowing costs, a lack of sector expertise and a shortage of financial products tailored to the unique risks of the EV space.
To re-energise bank credit lending, the Small Industries Development Bank of India has launched Mission 50K-EV4ECO. Launched in 2023, this programme aims to facilitate loans for around 50,000 EVs. Under the programme, the bank will provide loans to micro, small and medium enterprises to acquire EVs and help small NBFCs become key players in last-mile EV financing. The pilot programme has already sanctioned around $22 million (Rs 1.9 billion) of capital to NBFCs, fleet operators and aggregators, contributing to the adoption of more than 18,000 EVs. This marks a promising start to what could be a game-changing journey in the domestic EV financing landscape.
Positive outlook
With various supportive policies already in place, the growth and expansion of the sector now depend on capital availability. Financial collaborations will play a crucial role in ensuring sufficient capital.
In addition to existing sources of financing, future initiatives will rely on government grants, multilateral loans and innovative financing mechanisms like battery-as-a-service (BaaS) to overcome initial challenges, scale up projects and accelerate the adoption of EVs.
The EV industry has made a significant impact in the infrastructure space, a significant shift from 10 years ago when EVs were expensive, had limited support from both manufacturers and consumers, as well as a lack of investment commitment. With trends shifting towards technologically advanced infrastructure, this vehicle class is well positioned for the future.
By Harman Mangat
