By Anjali Tandon, PhD, Associate Professor, Institute for Studies in Industrial Development
India imports 91 per cent of its crude oil requirements, thus exposing the economy to geopolitical risks and supply shocks. International conflicts have impacted India even as a third party, where every spike in global oil prices – as witnessed during the recent US-Iran conflict – feeds into inflation, thus impacting household budgets, and the widening current account deficit adds to the overall fiscal stress in the economy. The present energy transition should not become a case of swapping one strategic import dependence for another.
Learning from decades of experience, the blueprint for modern energy is being developed on different considerations. The distinguishing feature of modern clean and renewable energy is its dependence on manufactured technologies and supply chains. For instance, while electricity from solar and wind sources appears to be fuel-free, the generation depends on input materials such as critical minerals and equipment such as solar modules, wind turbines and machines, rather than on fuels, unlike coventional fossil fuel-based generation. Perhaps the most critical pillar of the clean energy landscape is storage, particularly batteries. Batteries address the intermittency of the renewable electricity system. Domestic battery manufacturing remains weak, with a significant proportion served by imports. But more worrisome is the concentration of imports from a single partner, China. The dependency has continuously increased since 2020, crossing the 90 per cent mark. This is even higher than India’s dependence on Russia for crude oil imports, with 37.5 per cent of its crude oil imports sourced from Russia. This underscores the potential vulnerability of India’s green transition to the already fragile geopolitical situation and potential supply shocks.
Consequently, the modern energy playbook is shifting the basis of energy security from securing fuel supplies to securing manufacturing capabilities, technological capacity and the resilience of its supply chains for batteries. This presents India with an enormous opportunity for manufacturing expansion with green attributes, reducing external dependence, redirecting foreign exchange from imports to domestic innovation and research and development, and above all, creating jobs within the economy.
While importing equipment in the early stages of the transition is inevitable, excessive dependence on battery and electrical input imports is not ideal. Cognisant of the fact, the government’s response to the rising battery demand, driven by growing renewable electricity and electric mobility, has gone beyond facilitating indigenous supplies to incentivising domestic capacity building. The recent notification by the Ministry of Finance is a step in this direction, providing a firm signal to the domestic industry. The elimination of import tariffs on as many as 85 categories of specialised capital equipment used in battery manufacturing provides import relief for a long list of capital goods. Earlier, these items attracted customs duty of 7.5-15 per cent. The declared exemptions, which remain in effect until March 31, 2029, provide at least a three-year window of cheaper access to equipment. The items cover all phases of battery production and utility systems, including powder and material preparation, electrode manufacturing (front end), cell assembly (middle end), cell activation and finishing (back end), and facility auxiliary and environmental systems. By contrast, the basic duty on a finished battery is 20 per cent. Duty-free intermediate equipment imports will provide a boost to domestic production of batteries that are increasingly required for battery energy storage systems, electric vehicles, consumer electronics, telecom, renewable energy integration, defence and data centres. By providing exemptions up to March 31, 2029, it not only provides tariff certainty to investors but is also well aligned with the long gestation periods of battery plants, with a construction phase of 18-24 months, followed by 12-24 months for a ramp-up.
Beyond tariffs, the notification corrects an intertemporal policy gap with the previously announced production-linked incentive scheme for advanced chemistry cells by lowering the upfront investment costs in specialised equipment, much of which is imported. Lower investment costs bridge the valley before the incentives are finally disbursed to the scheme participants. Once domestic factories are established, process learning will happen, ancillary and supplier networks will build up and domestic employment will be created.
Lower tariffs reduce the cost of establishing gigawatt-scale factories, providing a predictable investment regime. This, however, is not the last challenge. The production system will need a steady supply of upstream battery materials and critical minerals – the next frontier of India’s battery strategy.
