Government Doubles Down on EV Localization with Strategic Budget Measures
In a significant push to strengthen domestic manufacturing of electric vehicles (EVs) and their components, the government has announced a multi-pronged strategy in the latest budget. This includes the creation of four special corridors for rare earth minerals and the extension of crucial duty concessions for lithium-ion cell manufacturing and imports.
Enhanced PLI Allocation for Auto Sector Amid Strategic Adjustments
The production-linked incentive scheme for the auto sector (PLI-Auto) has received a substantial boost for the financial year 2026-27. The allocation has been increased by an impressive 111% year-on-year, reaching ₹5,939 crore. This enhanced funding is specifically aimed at promoting the manufacturing of electric vehicles within India, signaling strong governmental support for the EV ecosystem.
However, in a strategic recalibration, the PLI allocation for manufacturing lithium-ion cells—critical components used in EVs and battery storage systems—has been reduced by 45% to ₹86 crore. This adjustment comes as several prominent companies, including Ola Electric, Reliance Industries, and Rajesh Exports, have fallen behind their designated schedules for establishing gigafactories.
Retained Duty Concessions to Support Cell Manufacturing
The government has maintained favorable duty structures to support the lithium-ion cell manufacturing ecosystem. It has retained the zero customs duty for importing equipment used in the manufacturing of lithium-ion cells. Furthermore, it has extended a concessional 5% import duty on the imports of lithium-ion cells themselves. These measures are designed to lower production costs and encourage domestic manufacturing capabilities.
Shailesh Chandra, President of the Society of Indian Automobile Manufacturers and Managing Director & CEO of Tata Motors Passenger Vehicles, welcomed these initiatives. "Enhanced support for electronic components manufacturing, setting up dedicated corridors for mining and processing of rare earth, along with initiatives to establish high-tech tool rooms and supporting container manufacturing, will develop supply chain resilience and help in streamlining exports," Chandra stated.
Addressing Critical Supply Chain Dependencies
These developments are particularly timely as Indian automakers face mounting challenges. They continue to encounter difficulties in importing rare earth magnets and confront the prospect of more expensive lithium-ion cell imports. This is especially relevant as China moves to remove its export subsidies, which could lead to increased costs.
Currently, India is entirely dependent on imports for lithium-ion cells, sourcing them primarily from China, South Korea, and Japan. China alone accounts for more than three-fourths of these imports, with major players like CATL, BYD, and Eve being active in the Indian market. Japanese giant Panasonic and South Korean firms like LG also have a significant presence.
With China planning to phase out its export tax relief—currently at 9%—over the next year, Indian automakers are bracing for potentially higher lithium-ion battery prices. Given that a lithium-ion battery constitutes more than one-third of an EV's total cost, this could directly impact the final price of electric vehicles for consumers.
Establishing Rare Earth Mineral Corridors
In a landmark move to reduce import dependency, the government has unveiled an initiative to establish rare earth mineral corridors in four mineral-rich states: Andhra Pradesh, Tamil Nadu, Kerala, and Odisha. These corridors are designed to support companies interested in manufacturing rare earth magnets domestically.
This announcement follows the Union cabinet's recent approval of a ₹7,280-crore fund dedicated to supporting the domestic production of rare-earth magnets. Several companies, including Bharat Forge, JSW, Sona Comstar, Mahindra, Proterial, and Midwest, had previously expressed interest in manufacturing these magnets in India, contingent on appropriate incentives.
Expert Insights on Supply Chain Strengthening
Harshavardhan Sharma, Group Head for Automotive Tech & Innovation Group at Nomura Research Institute, highlighted the budget's focus on supply chain initiatives. "EV OEMs and tier-1 suppliers should accelerate localization strategies for motors, magnets, and power electronics to de-risk China-linked supply chains," Sharma advised.
Rishabh Jain, a Fellow at the Council on Energy, Environment and Water (CEEW), noted that the budget marks a pivotal shift from national policies to state-level execution. "By anchoring supply chains in mineral-rich states, we are finally bridging the critical gap between upstream mining and downstream manufacturing," Jain observed. "Crucially, the budget backs this intent with hard fiscal support—specifically by extending Schedule XII tax deductions to exploration and exempting duties on processing machinery, which directly de-risks private entry."
Current Localization Efforts and Future Commitments
On the ground, Ola Electric currently stands as the only firm that has successfully localized a portion of its lithium-ion cell requirements. Looking ahead, several major companies have made substantial commitments. Firms like JSW, Reliance, Tata Agratas, Exide, and Amara Raja have pledged to build gigafactories with a cumulative capacity exceeding 100GWh, which are scheduled to become operational by 2030.
These comprehensive measures underscore the government's determined effort to build a robust, self-reliant EV manufacturing ecosystem in India. By addressing both immediate fiscal incentives and long-term supply chain infrastructure, the budget aims to position India as a competitive player in the global electric vehicle market.
