India's electric vehicle (EV) sector is gaining momentum, fueled by the government's ambition to transform the nation into a global manufacturing hub and achieve net-zero emissions by 2070. To attract foreign investment and boost domestic production, the government has introduced a scheme offering reduced import duties for EV manufacturers who commit to establishing local manufacturing facilities. However, a key requirement of this scheme – the provision of substantial bank guarantees – has emerged as a potential obstacle for some foreign EV makers.

The Indian government's EV policy, officially launched with the application portal opening in June 2025, aims to incentivize global automakers to set up manufacturing plants in India. The policy offers a reduced import duty of 15% on a limited number of imported EVs, a significant drop from the previous rates of 70-100% for cars costing above $35,000. To qualify, manufacturers must commit to a minimum investment of $500 million (approximately ₹4,150 crore) in local manufacturing within three years and achieve 50% domestic value addition (DVA) within five years. Automakers can import up to 8,000 EVs annually at the concessional rate. The program allows the import of 26,000 electric vehicles over five years at the reduced rate with a $500 million investment.

To ensure that companies follow through on their commitments, the scheme requires them to furnish a bank guarantee equivalent to the total duty foregone or $790 million (₹6,484 crore), whichever is higher. This bank guarantee serves as a safeguard, ensuring that manufacturers meet the investment and localization targets. Failure to comply with these requirements would result in the invocation of the bank guarantee. The maximum duty foregone per applicant has been capped at ₹6,484 crore on the investment made under the scheme.

While the reduced import duties are attractive, the substantial bank guarantee requirement presents a challenge for some EV manufacturers. The guarantee ties up a significant amount of capital, potentially impacting their financial flexibility and investment capacity. Some companies may find it difficult to secure such large guarantees, especially if they are still in the early stages of establishing their operations.

Despite the challenges posed by the bank guarantee, several leading global automobile manufacturers, including Mercedes-Benz, Volkswagen, Skoda, Hyundai, and Kia, have expressed interest in participating in India's EV scheme. These companies recognize the long-term potential of the Indian market and are willing to navigate the complexities of the policy to establish a foothold in the country.

However, Tesla, which has been eyeing the Indian market for several years, has adopted a different approach. While the new EV policy was initially seen as a move to pave the way for Tesla's entry, the company has indicated that it is primarily interested in setting up sales outlets in India rather than manufacturing facilities. Union Heavy Industries Minister H D Kumaraswamy has stated that Tesla is not expected to participate in the scheme. This suggests that Tesla may not be willing to commit to the large investments and bank guarantees required by the policy.

The Indian government's EV policy reflects a strategic balancing act. It aims to attract foreign investment and promote local manufacturing while safeguarding the interests of domestic players and ensuring that companies are serious about their commitments. The bank guarantee requirement is a key component of this strategy, designed to prevent companies from taking advantage of the reduced import duties without making substantial investments in India.

Whether the bank guarantee requirement will prove to be a major deterrent for foreign EV makers remains to be seen. As India's EV market continues to grow, the government may need to revisit the policy and explore alternative mechanisms to attract investment while ensuring compliance. The success of India's EV ambitions hinges on finding the right balance between incentivizing foreign companies and protecting domestic interests.