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Hybrids have made a comeback in 2024. Will they spoil the EV party in India?
Summary
- Makers of hybrid vehicles are seeking tax concessions that will make their models more affordable. Electric vehicle makers, however, are opposing this. Mint looks at the pros and cons of the debate, and if the two vehicle types are as clean as claimed to be.
New Delhi: In January, Utkarsh Nigam, a resident of Bengaluru, was convinced his next car would be electric. The 38-year-old had test-driven all the electric vehicles (EVs) in the market, zeroed in on one, and discussed financing options with the dealer. Then, in March, as he was returning from Kodagu (Coorg) after a long weekend, he met a middle-aged couple stranded 80 kilometres from Bengaluru. Their electric car had run out of juice. Fortunately, the battery had died near an eatery that had a charging point, but they would have to wait an hour while it recharged.
The incident made Nigam nix his plans to buy an EV. It wasn’t just because of the time it would take to recharge as opposed to filling petrol or diesel. Rather, it was the uncertainty of being able to find a charging point—the couple Nigam encountered had been lucky, and he didn’t want to rely on luck. “While many charging stations have come up, they are not as reliable as your petrol bunk," Nigam told Mint. “That was the dealbreaker for me."
In May, Nigam got delivery of the next best thing to an EV—a hybrid, specifically, the Toyota Hyryder. While electric cars have a bulky lithium-ion battery and run purely on electricity, hybrids are a mix, with a petrol/diesel combustion engine mated to an electric motor powered by a relatively smaller lithium-ion battery. The Hyryder has a 1.5 litre petrol engine with a tiny 0.76 kwh battery pack. To put that in context, the all-electric Nexon EV has a 30.2-40.5 kwh battery pack.
While a hybrid lacks the rock bottom running cost and zero tailpipe emissions of an EV, it does not need to be plugged in to be charged—the battery recharges automatically using power from the engine and regenerative braking (see graphic), which Nigam found appealing.
The lack of charging outlets in India—there are about 12,000 public stations today against the million-plus needed by 2030—has accentuated range anxiety among those considering EVs. And like Nigam, many of them have shifted their loyalty to hybrids. This shift is perhaps the reason hybrid car sales have risen to match EV numbers. In 2023, the sale of ‘strong’ hybrid cars (see graphic) such as the Hyryder touched an all-time high of 82,607 units from under 20,000 units in 2022.
Indeed, despite attracting higher taxes, hybrids outsold EVs in the first and last quarter of calendar year 2023 and were almost at par in the first quarter of 2024 (see table). While EVs have a GST levy of just 5%, hybrid cars in India today attract GST of 43% (there are currently no small hybrids). In fact, the tax outgo on the hybrid versions of Maruti’s Grand Vitara and Toyota’s Hyryder, both SUVs, is a mere two percentage points lower than their comparable petrol or diesel models.
Even so, the current hybrids in the market are aggressively priced. The bestseller, Hyryder, costs between ₹19.34-23.44 lakh on-road in Delhi. The price of the bestselling electric car, the Tata Nexon EV, is ₹16.82-22.63 lakh. However, they are not strictly comparable as the Nexon is a sub-4-metre SUV and one segment below the larger Hyryder. Interestingly, despite the high level of taxation, the fossil fuel variants of the Nexon are cheaper than their EV cousin. The price of the petrol variant ranges between ₹8.76-17.04 lakh and accounts for the lion’s share (over 70%) of the brand’s sales, while the diesel version has an on-road price range of ₹11.13-18.35 lakh.
According to a Deloitte study, the preference for hybrids among potential consumers is rising. In 2023, 24% of consumers in India said they would prefer a hybrid car against 20% in 2022. For electric vehicles, that number has gone up from 8% to 10%. This is now being touted by manufacturers to seek a cut in taxes so that hybrids become more affordable.
“Taxes should be based on emissions. Putting hybrids in the same bracket as petrol or diesel is not fair," said Vikram Gulati, country head and senior vice president, Toyota Kirloskar Motor Ltd. “Electric is the cleanest and so should get the most incentives, but hybrids should also get some."
However, there is a fear that incentivizing hybrids might end up undermining the EV story in India.
“Offering additional benefits for hybrids could hinder the growth of EVs," said Puneet Gupta, director, S&P global mobility, an automotive consulting firm. “Manufacturers might then divert their resources to hybrids, isolating India from the global trend, where most key economies are aggressively moving towards majority EV adoption by 2035."
A Divided House
The clamour for a cut in tax on hybrids is largely emanating from the three large Japanese carmakers: market leader Maruti Suzuki, Toyota and Honda. They contend that a tax cut would make the technology more affordable and enable them to offer it in smaller mass-market models, as well. Currently, there are no small hybrid cars available in India.
“The cost of fitting the electric powertrain to a conventional car to make it a hybrid is between ₹2.7-3.1 lakh. That is what needs to be bridged. Without that it is difficult to offer hybrids under ₹10 lakh, where most of the sales happen," said Toyota’s Gulati. “It is not hybrid versus EVs but an overall fight against combustion engines. Every clean technology has a role to play."
The current tax regime incentivizes hybrid cars over petrol/diesel cars to a negligible extent. Should Toyota or any other company launch a small hybrid car less than 4 metres in length, the GST would drop to 28%. But that is just 1% lower than a small petrol car and 3% lower than a small diesel car. The industry wants the lower tax slab of 18% instead to cover the additional cost.
However, homegrown carmakers Tata Motors and Mahindra and Mahindra are against extending any sops to hybrid cars. They argue that since hybrids are not as environment-friendly as electric vehicles, they do not deserve an incentive.
“We have seen that the government has been firmly behind EVs, given most of the issues that the country faces in terms of acute pollution, import dependence on fossil fuels, and the net carbon zero stand that India has taken. Therefore, it’s an imperative to accelerate EV adoption," said Shailesh Chandra, managing director, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility, during an investor call last month.
“Governments around the world haven’t incentivized hybrid technology for the last 20 years because it is more expensive as you’ve got two powertrains (engine and electric motor). And emissions are really not that much better than internal combustion engines," said Anish Shah, Group chief executive officer, Mahindra Group, also at an investor call last month. “In EVs you get zero emissions and fuel use, which is why governments are incentivizing them and want the industry to transition to EVs."
Korean carmakers Hyundai and Kia are also backing EVs even though they haven’t quite taken to the EV market the way Tata Motors has. With an expanding bouquet of electric and hybrid cars in their global portfolio they have already announced production of localized EVs for India over the next two years.
“Electric is the final destination that can solve India’s problem of pollution and import of oil. The government has also encouraged EVs, so we have put all our investments into electric," said Tarun Garg, chief operating officer, Hyundai Motor India Ltd. “It will not be easy to change suddenly. If the government says hybrids will be incentivized, we will bring hybrids but it will be a step back. They should have thought of it earlier."
But given that hybrids are doing so well already, is all this just posturing by the industry or do they really need incentives for growth? “Without incentives, penetration of strong hybrids is likely to remain below 15% even by 2030. However, with incentives this could potentially rise to a third of the total market," said S&P’s Gupta.
For some, hybrids could just be a ploy to buy time to get ready for electrification, say observers. A study done by London-based think tank InfluenceMap found Japanese carmakers Toyota, Suzuki and Mazda to be the least prepared for an electric transition and pushing the hardest against it.
Government Undecided
If the industry is split down the middle, so is the government. Road transport and highways minister Nitin Gadkari has repeatedly made a pitch for a tax cut on hybrid cars. The department for promotion of industry and internal trade (DPIIT) had also written to the ministry of heavy industries recommending some benefits for hybrid cars in view of them being more fuel efficient—by 36%, the companies claim—and environment friendly than conventional petrol and diesel vehicles.
The ministry of finance, however, is not convinced. “We are aware of their arguments and are not convinced. EVs attract lower taxes and the guidance is clear. Manufacturers should focus on developing electric cars instead," a finance ministry official told Mint.
To be fair, the finance ministry did offer hybrids incentives in the past, before the GST era, but that did not go as anticipated. In the first iteration of the government’s flagship Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme, launched in 2015, incentives were offered for all types of hybrids—mild, strong and plug-in. But they were discontinued in 2017 after mild hybrids cornered the lion’s share of the incentives. The Maruti Ciaz, Ertiga and Mahindra Scorpio were the cars that benefited the most.
Apart from killing the incentive, the government also levied a 15% cess on hybrid cars under the GST regime, which increased the tax incidence from 30.3% excise to 43% GST. Hybrids suddenly became more expensive, leading to protests from the industry.
“We have done a detailed study on auto industry demand and a paper has been made. The fact (lower emissions) that is being presented (by the industry), according to the paper, is not correct," former finance minister Arun Jaitley had said in June 2017, responding to a demand by the industry for a reduction on GST on hybrid vehicles to 18%. The government has been non-committal on incentives for hybrids ever since.
Which is Cleaner?
At the core of this lobbying for incentives are two questions. How clean are hybrids, and are EVs really as clean as they claim? Japanese carmakers say hybrids are significantly cleaner than conventional combustion engine vehicles, with carbon emissions almost 36% lower—the Honda City hybrid has a certified CO2 emission of 89.5 grams per kilometre (g/km) against the petrol version’s 128.8g/km.
EVs have no tailpipe emissions whatsoever and are far cleaner. However, the bulk of the electricity that powers the batteries in an EV in India is produced by burning dirty coal. Multiple studies are quoted to embellish one or the other narrative, muddling the debate.
An IIT Kanpur study says manufacturing, usage and scrapping of EVs in India produces 15-50% more greenhouse gases than conventional fuel and hybrid cars. Similarly, a report by HSBC Global Research says total carbon emissions at ‘well to wheel’ level for an EV in India currently stand at 158g/km against a hybrid car’s 133g/km, and it may take up to 10 years for both to converge. Under the well-to-wheel scenario, power generation emissions are factored in for EVs, while crude oil mining/refining and tailpipe emissions are measured for hybrids.
Other studies counter these arguments. For instance, a widely circulated study by the International Council on Clean Transportation (ICCT) in 2021 found that even with a dirty grid, where over half the electricity is produced by burning coal, lifetime emissions from battery electric vehicles were 19-34% lower than those of internal-combustion-engine vehicles. The gap would widen as renewable energy replaced thermal power in the grid over the next decade, it added.
“If we go with the polluter pays principle, which is followed in many geographies and industries, the government should not extend any tax benefits to strong hybrid vehicles as these are not zero-emission vehicles. The logic of EVs getting tax benefits is precisely on the point that it is a zero tailpipe emitting vehicle technology, which has positive externality in terms of local air quality," said Sharif Qamar, Associate Director, Transport & Urban Governance Division, at sustainability think tank TERI. “Even with the current grid electricity emission factor, EVs score better than ICE technology."
What makes policymaking even more difficult is that hybrids may not be that clean either. Real-world emission tests of about 600,000 hybrid cars in the EU found that their emissions were 3.5 times higher than claimed.
“The variation in the real world and lab tests implies that emissions from hybrid vehicles are closer to the emissions from ICE vehicles," said Dr Himani Jain, Senior Program Lead, Council on Energy, Environment and Water (CEEW). “This disparity occurs because in real life, these vehicles are driven more on ICE fuels and minimally on the EV drivetrain, unlike in test conditions."
Are EV Sales Slowing?
In India, the growth in hybrid sales is largely being driven by market leader Maruti Suzuki. The company drove into the hybrid arena with the Grand Vitara strong hybrid model, sourced from Toyota, in 2022, and followed that up with the Invicto last year.
India is not the only country witnessing a surge in the sale of hybrids. In the US, Europe and even China (the world’s biggest electric car market), hybrids are witnessing a resurgence of sorts. In the first quarter of 2024, demand for hybrids in the EU was at its highest level since 2021. At nearly 329,000 units, hybrids registered an 18% increase over the first quarter of 2023 and 50% over 2022. Electric car sales increased by only 3.8% and 39%, respectively, over those periods.
In the US, too, hybrid sales have risen five times faster than EVs so far this year, with inventories of the latter piling up at dealerships, forcing manufacturers to realign and increase production of hybrids. In China, plugin hybrid sales shot up 80% in 2023 against 23% growth for EVs.
While the trends in India and the rest of the world appear to be similar, the reasons are different. Globally, governments have clamped down on the subsidies that have propelled sales of EVs in the last decade, leading to a rise in costs and a proportionate cooling of sales. In India, it has more to do with charging infrastructure not keeping pace with demand.
“A lot of people tend to compare India with the rest of the world. I don’t think that’s right as our EV penetration is 2%, while others are reaching some kind of saturation at 15-25%," said Rajesh Jejurikar, chief executive officer, auto and farm sectors, Mahindra & Mahindra. “In India, we don’t do anything 10 years ahead of when it’s needed. So, as sales pick up, charging infrastructure will come. India needs a really wow product. Today’s electric offerings are very functional."
While their sales are surging, a tax cut will be the icing on the cake for hybrid makers. But will the government bite the bullet and extend its EV largesse to them? The announcement of the FAME-3 scheme in the budget next month should reveal the answer.
