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

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

Shares of Ola Electric Mobility Ltd. have surged 42% from their issue price in the first three trading sessions. The Bengaluru-based startup is being closely watched as a bellwether for the country’s industrial ambitions. Overshadowed by China’s global success and its own prowess in tech services, can India revive its stagnant manufacturing industry? Ola Electric would be a suitable case study.

Backed by SoftBank Group Corp. Electric vehicle manufacturerwho has been selected not for one, but two separate projects. state incentivesis an example of India’s push policy. Its scooters recently cleared the domestic value-added hurdle to qualify for sales-linked subsidies for five years. In addition, part of the $733 million IPO will go toward increasing the capacity of its 1 gigawatt-hour plant. battery factoryReaching 20 GWh by June 2026 will help Ola collect incentives aimed at encouraging local battery manufacturing.

But subsidies to producers will only help improve profit margins. The bigger issue is demand. India sells far more two-wheelers than cars, and just over 5% of scooters and motorcycles registered last fiscal year were electric. Industry watchers expect that by 2028, half of those vehicles will be battery-powered, creating an industry with about $40 billion in annual revenue and viable export markets in Africa, Latin America and Southeast Asia. The government will have to throw money at price-sensitive consumers to get enough of them to switch, though.

At this point, the Modi government’s resolve has wavered in the past. In June last year, it abruptly cut the subsidy for first-time vehicle buyers, raising the price of Ola’s entry-level electric scooter by nearly 23,000 rupees ($275). The increase was more than what 90% of India’s population earns in a month. Not surprisingly, demand in the three months that followed plummeted by 75%, according to the IPO prospectus.

This year, the situation is once again uncertain. The old incentive program has expired and a new one has yet to be introduced. The industry had hoped that upon its return to power, the Modi government would vastly increase the subsidy and perhaps channel more of it toward strengthening India’s meager charging infrastructure. But last month’s annual budget included no new allocations. There is still a tax advantage for consumers who buy electric scooters Instead of gasoline-powered ones, it’s not enough to simply push EV adoption as aggressively as the industry wants. Even the previous set of subsidies ran into trouble. That’s because New Delhi tried to do too much with its tools. The consumer incentives, for example, were intended as a spur 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 the efforts to manipulate it. Companies like Hero Electric Vehicles Pvt, Okinawa Autotech International Pvt, and Benling India Energy & Technology Pvt got into trouble for allegedly violating localization rules. The government stopped paying the subsidy and started reclaiming what it had already given to automakers. It also threatened to blacklist some manufacturers from government programs. Ola and rival Ather Energy Pvt, which had sold chargers separately to keep the price of vehicles eligible for state-sponsored rebates, had to refund charger costs to buyers.

Similar problems can easily arise again.

From textiles to electronics, Modi’s production-linked incentives (PLIs) are available to a wide range of industries. The carrots have often been accompanied by a protectionist hike in import tariffs. As University of Chicago economists Raghuram Rajan and Rahul Singh Chauhan have said: “The Indian consumer pays a high price because of the tariffs, and the Indian taxpayer pays the subsidy.” From that perspective, EV subsidies are at least trying to make green vehicles cheaper for local consumers, while also seeking 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 placed on limited fiscal resources) means that the stability of that support cannot be taken for granted.

“If we are unable to claim government incentives under the PLI schemes or if these are discontinued, we may become less competitive,” Ola said in its prospectus, while warning investors of a repeat of the June 2023 crisis after the government suddenly cut consumer subsidy. Cancelling confirmed orders means returning a lot of money.

Industrial output accounts for 26% of China’s gross domestic product, while in India it accounts for 13%. The premature deindustrialisation of this smaller economy has greatly affected investment options.

Ola Electric founder Bhavish Aggarwal started out as a ride-hailing service. When the pandemic crushed mobility, the 38-year-old decided to reduce the group’s dependence on Ola Cabs. Its Indonesian counterpart Gojek followed suit. But by merging with PT Tokopedia to become GoTo Group, Gojek stayed true to its position as a data-dependent e-commerce platform. Aggarwal’s pivot to electric vehicles was an odd choice because it involved facing 22 different labor laws and massive product quality issues, such as a vehicle that burst into flames in the Indian city of Pune.

The IPO has cemented his position as one of the world’s youngest billionaires. But Ola Electric’s success will depend as much on Aggarwal taking advantage of the $127 million he has spent on research and development over the past three years as on state incentives. These have been fickle in the past and may be again.

(Disclaimer: The views expressed in this column are those of the author. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)