Explained: Why Musk should heed Centre's advice to make Tesla cars In India

The Government of India has just sent out a strong message that it will protect business participants in the Rs 76,000-crore Performance Linked Incentive (PLI) scheme even as it rejected a demand from Tesla for a drastic reduction in import duty of electric vehicles (EVs).

What's the Tesla offer about?

Tesla, the world's leading maker of electric vehicles (EVs), wants the Government of India to allow it to import cars made elsewhere at lower duty rates. If allowed, it would hit the prospects of local car manufacturers like Tata Motors and Mahindra & Mahindra for the sake of a foreign predator.

Tesla makes cars in China and other countries and has not yet made any commitment to invest in a car manufacturing facility in India.

"Foreign automobile companies are expected to establish production facilities in order to sell cars in India. If the government reduces import tariffs for EVs, the import will be a preferred option, which will hurt local manufacturing and the Make in India policy as a whole," Sugato Sen, former deputy director-general of the Society of Indian Automobile Manufacturers told News9Live.com.

If the tariff is reduced, local manufacturers would find it easier and more profitable to import foreign-made cars instead of making them in India. This will slow down the pace of indigenous manufacturing in the country.

Govt, Opposition divided over Tesla offer

Tesla's headline-grabbing chairman, Elon Musk, caused a stir in India's political circles on January 13 by tweeting, "Still working through a lot of challenges with the government". He was referring to his demand for a reduction in import duty on his cars.

Politicians in five states — Maharashtra, West Bengal, Tamil Nadu, Telangana and Punjab — jumped to the bait. There was a flurry of tweets from these leaders, who want the Central Government to relax import duty on Tesla EVs. They are also inviting Musk to establish manufacturing in their states.

Each of these politicians come from states that are ruled by non-BJP parties. This has led to a question about whether the flamboyant Tesla chief had issued the tweet to put political pressure on New Delhi.

This is what explains the somewhat sharp reaction from Minister of State for Heavy Industries Krishan Pal Gurjar who questioned the logic of making cars in China and using India as the market to sell them.

"The company wants workers from China and the market of India. This is not possible in the Modi government... our government's policy is that if the Indian market is to be used, job opportunities will have to be given to Indians," Gurjar told the Lok Sabha on Tuesday.

India import duties 'highest in the world'

Musk had said in July last year that Tesla wants to launch its cars soon in India, but Indian 'import duties are the highest in the world by far of any large country!'

Indian duties at above 100 per cent of the cost of imported cars would seem steep if seen as a tax measure to raise funds for the government. But the high duty structure is part of a deliberate policy to attract investors to make cars in India instead of paying high duties.

By imposing high duties, the government is making a clear price distinction between imported and locally manufactured cars. This policy has reaped benefits in the telecom industry because foreign mobile phone makers like Apple, Samsung and Xiaomi created plants in India precisely because importing them was costlier.

Apple which launched operations in Bengaluru in 2017 and has continuously enhanced its market share, presents a significant example. There was no way its iPhones would have made a strong presence in India, a marker with massive potential, if it continued to depend on importing at prices beyond the affordability range of Indian consumers.

"Since then, we've expanded with facilities here and in Chennai, manufacturing several iPhone models for the domestic market and for export. Along with our supply chain, we are investing significantly in India to develop our operations, expand our reach, and engage with more local suppliers," Apple's Vice-President (Product Operations) Priya Balasubramaniam told a conference last year.

Now, Musk is asking the government to reverse directions and offer low tariff rates to one carmaker at the cost of other players who are investing in India.

"We looked at whether the duties need to be re-jigged, but some domestic production is happening and some investments have come in with the current tariff structure," Vivek Johri, chairman of the Central Board of Indirect Taxes & Customs (CBIC) said recently.

"So, it is clear that this is not a hindrance," he said.

But low import duties will hurt local manufacturing

Some in the industry and political life, though, support the idea of giving high incentives to Tesla and other companies which have taken lead in the use of sophisticated technology. The idea is to maintain India's attractiveness as an investment destination.

"All successful countries including China and Taiwan have favourable trade policies. Low duties for a sufficiently long period will help us develop the ecosystem to not just invite foreign companies but also develop the capabilities of local companies," Pranay Kotasthane, chair of the high-tech geopolitics programme at The Takshashila Institution told this writer.

Similar sentiment has been expressed by Maharashtra chief minister Uddhav Thackeray who said, "Pioneering companies like Tesla, Rivian, Audi, BMW among many others must be given a time-bound concessionary customs rate for the import of vehicles."

The state government has written to the Centre pleading for lower import duty for Tesla cars because that would boost India's supply chain ecosystem and manufacturing process for electric vehicles (EVs). Similar arguments have been made by several Opposition politicians.

But showcase-ready cars, if imported, cannot boost technology development and ecosystem in India unless the manufacturing process gets started. Tesla has neither applied for investment nor given any commitment about investing in a certain time frame.

What it wants is to use the Indian market for a test drive for a few years and the company will consider investing in India only if it finds the market mature enough to serve its needs. This is a remote promise with no sign of commitment.

If allowed, Tesla will compete with high-end Indian cars like Tata Motors and Mahindra & Mahindra at the same price level and manage to defeat them because of the special attraction that it commands.

"Tesla is a superclass car. Those who want it should pay high import duty, Why should the government subsidise the high-end buyer at the cost of people who buy low-cost cars?" a government official said.