Fiscal Support for Electric Vehicles in India: Incentives, CO₂ Abatement, and Policy Trade-offs

Executive Summary

The government’s push towards vehicle electrification in recent years has been driven by the need to reduce emissions from the road transportation sector. Central and state governments have been offering incentives to bridge the cost differential between electric vehicles (EVs) and conventional Internal Combustion Engine (ICE) vehicles. These incentives are in the form of purchase subsidies and concessional tax rates on vehicle sales. Given the climate consideration for offering these incentives and the fiscal cost for the exchequer to support them, it is imperative to assess the efficacy of these incentives in terms of carbon dioxide (CO₂) abatement.

This study aims to address the following research questions:

• What do the current fiscal incentives offered by the government to EVs in India translate to in terms of potential climate benefit?
• How do India’s EV incentives compare globally and with other domestic climate interventions in the country?

The analysis considers purchase subsidies offered under the central government’s PM Electric Drive Revolution in Innovative Vehicle Enhancement (PM E-DRIVE) scheme, and tax incentives in the form of lower applicable rates of Goods and Services Tax (GST) and Motor Vehicle (MV) tax, to electric passenger cars and electric two-wheeled vehicles. For comparison with other domestic climate actions, the study considers offshore wind power generation, green hydrogen production and residential rooftop solar (RTS). These interventions are at an early stage of maturity or have seen limited progress in uptake. They also greatly benefit from government incentives.

To contextualise India’s EV incentives in a global context, the study examines incentives for electric passenger cars and the corresponding CO₂ emission mitigation benefit in some of the advanced EV markets such as Norway, the United States (US), and China. Similar to India, all these countries have implemented targeted fiscal incentives to encourage EV uptake.

Key Findings

1. Electric two-wheeled vehicles deliver greater climate benefits than electric passenger cars for every rupee spent by the government. The study finds that for the same level of incentives, an electric two-wheeled vehicle is able to avoid nearly twice as much CO₂ emissions compared to an electric passenger car. This gap arises due to the higher magnitude of the electric car incentive and the limited emission advantage of an electric car over its conventional counterpart on account of the former’s below-par energy economy.
2. Electric car incentives cost more to the government to reduce emissions compared to other domestic climate actions. Mitigation of one tonne of CO₂ through electrification of passenger cars costs the government significantly more than through clean electricity generation from residential RTS or offshore wind. However, the support per unit of CO₂ abated offered to green hydrogen as a replacement of grey hydrogen is at par with electric passenger cars (Figure ES-1).While the existing incentives offered to residential RTS to realise one tonne of CO₂ abatement are much lower compared to EVs, it is worthwhile to note here that solar Photovoltaic (PV) has been benefitting from sustained government support since the launch of the National Solar Mission in 2010.

   It is important to consider here that the climate benefit from EV incentives is lower due to the high carbon burden of India’s grid electricity, where fossil fuels account for almost 75% of the generation. A high emission factor of the electricity grid boosts the CO₂ mitigation potential for renewable energy (RE) like wind and solar but undermines the emissions impact of EVs.

   

   

3. India’s nominal incentives for an electric passenger car are lower than some of the advanced EV markets. India’s nominal incentive for an electric car in the form of a GST concession is lower than incentives in countries like Norway, the US and China (Figure ES-2). For the same level of incentives, India is able to realise greater CO₂ abatement compared to these countries. This is despite India’s grid being the most carbon-intensive among these countries along with a much slower rate of decarbonisation. After adjusting for Purchasing Power Parity (PPP) to reflect the differences in prices between countries, the electric car incentive for each unit of CO₂ avoided becomes nearly four times higher than its nominal value. This suggests that there is a substantial value of the fiscal incentive for EVs in the Indian context. However, India still has a lower incentive for CO₂ abatement compared to Norway and China in PPP terms.

Policy Perspectives

While the National Action Plan on Climate Change (NAPCC) was launched in 2008, India’s EV journey began in 2015 with the introduction of the FAME-I (Phase-I of Faster Adoption and Manufacturing of (Hybrid &) EVs) scheme and gained momentum after the implementation of the Phase-II of the scheme in 2019. EV sales in this period have risen from 0.6% of overall sales in Financial Year (FY) 2018–2019 to 7.5% in FY 2024–2025. The window for assessing the climate impact of EV incentives is relatively short.

The higher carbon burden of India’s electricity grid being a major underlying cause for EVs to deliver lower climate benefits, it is a strategic imperative for the country to accelerate the share of clean electricity in the supply. This is in no way to suggest wait-listing climate interventions that are dependent on clean electricity availability until there is enough progress in reducing the carbon load of electricity. There will be an opportunity cost for delaying climate levers with conditional benefit at this stage.

This does not mean that the current limitations and red flags regarding the EV transition and its climate impact should be overlooked. Considering that a range of practical means is available to unlock the climate benefit from EVs in the current scenario, government policies, regulations, and programmes should give importance to aligning the use of EVs with climate objectives.

In a price-sensitive market like India, government support plays a critical role in influencing consumer preferences and stimulating early adoption of new clean technologies such as the electric drivetrain in vehicles. Experience from some of the global EV markets has shown that a premature rollback of incentives can potentially stall progress in the transition to a clean technology. Domestic experience in RTS uptake in the residential sector also shows that consumer-facing clean technologies require sustained government support.

Channelling incentives to build shared infrastructure like supporting the rollout of public charging stations is also a meaningful way to enable the EV transition. Spending on supporting charging infrastructure deployment turns out to be a much more cost-effective use of public funds, as it potentially delivers benefits to the entire spectrum of EV users at a fraction of the cost.

Going forward, incentives for EVs need to evolve. The government may focus on supporting the hard-to-electrify segments while tapering down incentives for self-sustaining vehicle segments. At the same time, policymakers should adopt a carrot-and-stick strategy as an effective way to accelerate the EV transition and reduce dependence on fiscal incentives. In this regard, consideration should be given to introducing more stringent CO₂ emission targets for automakers, and fleet electrification mandates on commercial vehicles to complement the momentum created through incentives.

Given some of the challenges in the EV sector like supply-chain risks, there is a case for diversifying India’s transport decarbonisation strategy to consider other solutions such as biofuels with a flex-fuel engine, and fuel cells. However, these technologies have their own constraints. The absence of a clear direction in decarbonising road transport could lead to inadequate policy support, uncertainty in the industry and market inertia. With limited viable alternatives in the hard-to-abate mobility sector, EVs remain a promising long-term solution in the Indian context. The country has to prioritise investment in technologies that can truly take the economy to the Net-Zero milestone. A band-aid approach will end up slowing down the progress in reaching the ultimate goal.

Recommendation: A Mix of Policy Actions

Based on the presented findings in the context of the broader policy and sector landscape, the paper suggests five broad policy interventions with the objective to maximise the climate benefit from every rupee spent on EVs and reduce dependence on subsidies to promote a faster EV transition.

i. A decarbonisation strategy for road transport to guide policy actions: Develop a clear roadmap to decarbonise motorised road transport that takes into account associated risks and co-benefits and links incentives with benefits or outcomes. This will help target the government’s resources to support climate mitigation in the sector more effectively.

ii. Renewable-energy-heavy EV charging: Accelerate RE penetration in the grid supported by faster deployment of utility-scale energy storage and the introduction of solar-aligned time-of-day electricity tariffs for EVs for greater RE offtake during EV charging, thereby increasing the emission abatement impact of EVs. Wherever feasible, integrate charging stations with distributed RE resources like RTS systems.

iii. A priority-order for directing incentives based on climate impact: Channel subsidies to only those EV segments or use-cases that are more polluting and harder to electrify (like trucks) and environmentally and socio-economically more beneficial (like buses including privately managed fleets). This apart, provide fiscal support to develop shared infrastructure like upstream electrical systems, which are otherwise costly, to encourage a faster and more economical rollout of public charging stations that will benefit the entire spectrum of EV users. Adopting this approach would help realise greater climate dividends from the available fiscal resource of the government.

iv. A predefined logic-based sunset clause for incentive schemes: Include a clear incentive phase-out plan in the government’s support programmes for EVs. The tapering down of incentives should be based on a set rationale, ideally linked with targeted outcomes. For example, MV tax concessions to privately registered EVs can be ended as the total cost of ownership of an EV becomes competitive in the given use-case. Such a rationale-based approach would help free up the financial bandwidth of the government to support harder-to-electrify EV segments.

v. Research and development (R&D) to reduce the cost of adoption and improve product performance: Increase spending on R&D significantly to support cost-effective production of EVs and their components, particularly batteries, with improved performance which will ultimately enable EVs to become the preferred choice for a broader range of consumers. This will help reduce the dependence on EV purchase incentives. Enhanced energy economy of EVs because of performance improvement can potentially unlock greater climate benefits.

It is worthwhile to underline here that the assessment has not considered other possible imperatives of the government’s policy on EVs, like addressing urban air pollution, reducing crude oil imports, and transitioning to new-age technology with the rest of the world, which have national importance too.