PM Narendra Modi Shouldn’t Chase Elon Musk-led Tesla to Make in India

Nosebleed tariffs on imported electric vehicles should be lowered by PM Narendra Modi led govt, but not in hopes of persuading Elon Musk's Tesla to set up shop.

The Indian government may not allow the opening of Tesla shops in India. Check details here. (REUTERS)

Elon Musk may be close to winning a long-running battle of wills with the Indian government led by PM Narendra Modi. Policy makers in New Delhi have been hoping to entice Tesla Inc. to produce electric vehicles in India. Musk, meanwhile, wants to sell his cars here without paying the exorbitant import tariffs that India charges.

According to Bloomberg News, the two sides may now be close to an agreement that would slash tariffs on Tesla imports from 2024, as long as the company sets up a factory in India within the next two years. Tesla may invest $2 billion in the plant and commit to buying as much as $15 billion worth of inputs from domestic automotive component producers.

Elon Musk could certainly count such a deal as a win. Indian consumers, too, might not complain if they can buy top-of-the-line electric vehicles at tariff rates of only 15%, compared to the 100% they currently pay on imported autos.

If the Indian government believes this is how to build an EV-manufacturing ecosystem, however, it ought to think again.

No good is likely to come of concessions tailored for a single company, no matter how successful or high-profile. True, when this policy is eventually written, it will likely apply universally. Every EV maker willing to meet the requirements should be able to take advantage — excluding, probably, the Chinese companies that now account for over half of global EV sales.

At the same time, if the policy is designed specifically to suit Tesla's needs — say, by agreeing to the company's preferred timeline and tariff structure, or subsidizing “superchargers” rather than battery swapping  — it may not help competitors much.

New Delhi might point out that other policies designed with particular companies in mind have succeeded. In 2020, the government tweaked the rules around manufacturing and selling mobile phones in India in a bid to attract Apple Inc. The US technology giant has since produced $7 billion worth of products in India, with a promise to scale up to $40 billion within the next few years.

But Tesla is not Apple. For one, no policy maker anywhere should assume that a figure as impulsive as Musk will follow through on a promise of this sort.

Apple also has a genuine business case for manufacturing in India. The domestic market for iPhones is growing solidly. Morgan Stanley predicts that India will account for a fifth of Apple's user growth over the next five years and generate $40 billion of revenue over the next decade. Half of the $9 billion that mobile handset exports earn India comes from iPhones.

Tesla is unlikely to see the same kind of growth in India's extremely price-sensitive auto market. Many other foreign manufacturers have failed to crack India's car code. In 2021, Ford Motor Co. shut down its factories in the country after two decades, taking a $2 billion restructuring hit, partly because it couldn't compete on price.

One Indian auto executive said at the time that the key to the domestic market was to “look at the whole value chain from raw material to resale and then, at every stage, you have to see how you can economize.” That does not sound like something Tesla has done well historically, which is, of course, another reason why Musk has held out for so long on an India move.

As recently as July, Indian officials were insisting that “no special policy” would be framed to lure Tesla to India. So, what could have changed? Musk's preferences certainly haven't. More likely, the government — now just months away from a re-election campaign — is willing to go the extra mile for a good-news headline.

I'm not arguing that India's tariffs on EVs should remain as high as they are. There's a good case for lowering barriers to vehicles that will speed up India's transition to low-carbon mobility.

But that decision should be technology- and company-neutral. It should be determined by what best serves India's climate priorities and its consumers.

Building up a domestic EV manufacturing system is a completely different task — one that can't be accomplished through discretionary tariff changes. What might help, instead, are solid investments in the supportive infrastructure — from electricity rates to charging stations — that would make investments in EV manufacturing more attractive for both Indian and foreign automakers.

Above all, those companies want policy certainty. Changing the rules to suit the whims of someone as mercurial as Elon Musk, unfortunately, radiates the opposite.

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