Automaker Ola Electric’s IPO is putting Modinomics to the test

By Andy Mukherjee

For the first time in two decades, a major Indian automaker has made a stock-market debut, and an impressive one at that. The continued success of the electric-vehicle manufacturer will depend critically on Prime Minister Narendra Modi’s industrial policy.

Ola Electric Mobility Ltd. shares jumped 42 per cent over their issue price in the first three trading sessions. The Bengaluru-based startup is being closely watched as a proxy for the country’s factory ambitions. Overshadowed by China’s global success, and its own prowess in technology services, can India revive its stymied manufacturing industry? Ola Electric would be an apt case study.

The SoftBank Group Corp.-backed EV maker, which has been selected for not one, but two separate state incentives, is a poster child of India’s policy push. Its scooters recently crossed the domestic value-addition hurdle to become eligible for sales-linked subsidies for five years. In addition, part of the $733 million initial public offering will go toward raising the capacity of its 1 gigawatt-hour battery factory. Reaching 20 GWh by June 2026 will help Ola collect inducements meant to encourage local battery manufacturing.

But producers’ subsidies will only help with profit margins. The bigger issue is demand. India sells many more two-wheelers than cars, and a little over 5 per cent of scooters and motorcycles registered last fiscal year were electric. Industry watchers expect that by 2028, half of such vehicles would be battery-operated, creating an industry with roughly $40 billion in annual revenue and viable export markets in Africa, Latin America and Southeast Asia. However, the government will have to throw cash at price-sensitive consumers to get enough of them to switch.

This is where the Modi government’s resolve has wobbled before. In June last year, it abruptly cut the subsidy for first-time buyers, lifting the price of Ola’s basic e-scooter by nearly 23,000 rupees ($275). The increase was more than what 90 per cent of India’s population earns in a month. No surprise then that demand in the next three months collapsed by 75 per cent, according to the IPO prospectus.

Things are again uncertain this year. The old incentive program has expired; a new one is yet to be unveiled. The industry was expecting that after returning to power, the Modi government would vastly ramp up the subsidy, and perhaps channel more of it toward shoring up India’s paltry charging infrastructure. But last month’s annual budget made no new allocations. There’s still a tax advantage for consumers who buy electric scooters instead of gasoline-powered ones. But it isn’t enough to push EV adoption as aggressively as the industry wants.

Even the previous set of handouts had problems. That’s because New Delhi tried to do too much with its tools. The consumer incentives, for instance, were meant as a fillip to decarbonization, but they came loaded with other goals, such as pushing the EV industry toward less reliance on China for parts. The more complex a policy, the more intricate are the efforts to game it.

The likes of Hero Electric Vehicles Pvt, Okinawa Autotech International Pvt, and Benling India Energy & Technology Pvt got into trouble for allegedly violating localization norms. The government stopped paying the subsidy, and started reclaiming what it had given the automakers already. It also threatened to blacklist some manufacturers from government programs. Ola and its rival Ather Energy Pvt, which had sold chargers separately to keep the price of vehicles eligible for state-sponsored discounts, had to refund the charger costs to buyers.

Similar problems can easily crop up again.

From textiles to electronics, Modi’s production-linked incentives, or PLIs, are available to a range of industries. The carrots have often come laced with a protectionist increase in import duties. As University of Chicago economists Raghuram Rajan and Rahul Singh Chauhan have said: “The Indian customer pays a high price because of tariffs, and the Indian taxpayer pays for the subsidy.” From that perspective, EV grants are at least trying to make environmentally friendly vehicles cheaper for local consumers even as they seek to boost domestic production.

The flip side of this primacy of state intervention is that it makes companies like Ola heavily dependent on government support. India’s legendary propensity for bureaucratic tinkering — not to mention the many other demands on limited fiscal resources — means that the stability of such support can’t be taken for granted.

“If we are unable to claim government incentives under the PLI Schemes or the PLI Schemes are discontinued, we may become less competitive,” Ola said in its prospectus, while also warning investors about a repeat of the June 2023 funk after the government suddenly slashed the consumer subsidy. Cancelling confirmed orders means giving back a lot of money.

Factory production accounts for 26 per cent of China’s gross domestic product; the figure for India is 13 per cent. Premature deindustrialization in the smaller economy has greatly affected investment choices.

Ola Electric’s founder Bhavish Aggarwal began with ride-hailing — an urban service. As the pandemic crushed mobility, the 38-year-old decided to cut the group’s reliance on Ola Cabs. His Indonesian peer Gojek did the same. But in merging with PT Tokopedia to become GoTo Group, Gojek stuck to being a data-dependent, e-commerce platform. Aggarwal’s EV pivot was an odd choice because it meant braving 22 different pieces of labor-related legislation and massive product-quality issues — like a vehicle bursting into flames in the Indian city of Pune.

The IPO has cemented his position as one of the world’s youngest billionaires. But the success of Ola Electric will ride as much on Aggarwal making a go of the $127 million he has spent on research and development in the past three years as it will on state incentives. They have been fickle in the past, and can be again.