Economics Essay: GST Impact on Battery Market and Electric Vehicles

This economics essay examines the impact of the Goods and Services Tax (GST) on the battery market in India, particularly concerning electric vehicles (EVs) and solar energy storage. The essay analyzes the effects of a high GST rate (28%) on battery prices, supply, and demand, arguing that a reduction to 5% would lower prices, increase equilibrium quantity, and stimulate the EV and renewable energy sectors. It uses supply and demand diagrams to illustrate these effects, including increased producer and consumer surplus. The analysis extends to the EV market, showing how lower battery costs would reduce EV prices and increase demand. The essay also considers the impact on petrol vehicles, highlighting the competitive dynamics. The conclusion strongly advocates for a GST reduction on batteries to support India's EV and renewable energy goals, emphasizing the economic feasibility for consumers. References from economic literature support the arguments.

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GST Hike in Battery
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Introduction
The introduction of GST regime in India has created a stir amongst solar energy producers
and related stakeholders who are banking on green renewable energy push which has been
initiated by the Indian government. The major issue of contention is the high GST rate of
28% which is applicable on batteries used in electric vehicles and solar energy storage
(Mishra, 2017). The objective of the essay is to highlight the impact of this high GST and to
critically analyse the case for lowering the same.
Impact of GST lowering on battery market
As GST is an indirect tax, hence the reduction from 28% to 5% as demanded by
manufacturers would lead to a lowering of the price and the consequent increase in the
equilibrium quantity. This is because on account of the lowering GST on the producers, the
supply of these batteries would increase (Mankiw, 2014). This can be represented through the
shift in supply curve as indicated below (Arnold, 2008).
Owing to the increase in the supply from the battery manufacturers, the equilibrium price
would decrease as indicated from P1 to P2. Also, the equilibrium quantity would increase from
Q1 currently to Q2. Hence, it is apparent the reduction of the GST would enable the
government to realise their stated agenda of 100% electric vehicles by 2030 (Besanko &

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Braeutigam, 2010). Besides, it will provide a spur to the solar energy production as well as
batteries are required for storage of power which can be used at a later time. Also, from the
above diagram it is apparent that there would be an increase in the producer surplus as well as
consumer surplus owing to the decrease of deadweight loss on account of levying of tax. This
is on account of lower prices for the buyers and overall lower tax burden for the sellers
(Krugman & Wells, 2008).
Impact of GST lowering on Electric Vehicle Market
It is known that one of the parts required for the manufacturing of the electric vehicles is the
battery. When the GST on the battery tends to reduce from 28% to 5%, essentially, it would
lower the cost at which the battery can be procured from the suppliers. This would lower the
cost of manufacturing for the electric vehicle manufacturers (Mankiw, 2014). As a result, the
supply curve would tend to right as highlighted in the diagram indicated below.
On account of the increased supply due to lower costs, there is lowering of the equilibrium
price for the electric vehicles making it more affordable for the customers. Additionally, the
equilibrium quantity would also increase as at lower price the demand is higher and the
requisite supply would also be available. As a result, the lowering to GST clearly provides
impetus to the consumption of electrical vehicles. In the short run, the profits would increase

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as the demand for electric vehicles is inelastic considering it is not a necessity (Nicholson &
Snyder, 2011). Hence, as the prices are lowered, the proportionate increase in demand would
be much higher leading to higher profits being generated even if all the cost savings are
passed on the consumers. However, in the long run, as the elasticity decreases and
competition increases, the profitability increase would be largely eroded (Arnold, 2008).
Impact of GST lowering on Petrol Vehicle Market
It is apparent that electric vehicles and petrol vehicles are substitutes and hence any move
which tends to increase the consumption of electric vehicles would have adverse impact on
the consumption of petrol vehicles. It is apparent that the decrease in the GST on batteries for
renewable energy would lead to increased consumption of the electric vehicles which on
account of their lower prices would become more affordable for the customers. As the
affordability of these electric vehicles improves, they become more competitive in relation to
petrol run vehicles. This would lead certain consumers to prefer electric vehicles over the
petrol run vehicles (Krugman & Wells, 2008). Therefore, it would result in lowering demand
of the petrol vehicles which is indicated in the following graph.
As a result of the lowering demand, there would be a decrease in the equilibrium price and
equilibrium quantity as is apparent from the graph indicated above. In the short run, even

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though the price would decrease but it is possible that in the long run prices may recover
especially as lowering prices make petrol vehicles more competitive than electric vehicles
assuming constant consumer preferences (Pindyck & Rubinfeld, 2001).
Proposal
Based on the above discussion, it is apparent to be a strong case for the decrease in GST on
the batteries used in renewable sector. This is especially from the perspective of electric
vehicles which still have limited acceptance in the Indian market where the price still
continues to be the main driver and not the environmental concerns. Additionally, for in
electric vehicle, recurring cost in the form of battery would be required because after a certain
time, the battery itself would need to be replaced. Higher cost of batteries would act as a
deterrent for consumers not only at the time of buying of vehicle but also with regards to
replacing the battery from time to time. As a result, continuation of high GST on batteries
would not be a good idea if the government has serious intentions to make it big in the field
of electric vehicles as economic feasibility would remain a significant parameter for the
consumers and thus the government along with manufacturer need to take measures to limit
the battery cost (Nicholson & Snyder, 2011).
Conclusion
The discussion in the above sections clearly indicates that lowering the GST would lead to
lower prices and thus higher equilibrium quantity which augers well for both the renewable
energy sector coupled with the future of electric vehicles. Since the battery is an input, hence
lowering cost of the same would lead to lower cost for the producer and hence it is possible to
generate a higher profit especially in the short run. Further, the petrol vehicles demand would
be adversely impacted on account of rising quantity consumed of electric vehicles. Hence, the
concerned minister must consider the plea of lowering the GST for batteries.

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References
Arnold, A.R. (2008). Microeconomics (9th ed.). Sydney: Cengage Learning.
Besanko, D. & Braeutigam, R. (2010). Microeconomics (4th ed.). New York: John Wiley &
Sons.
Mankiw, G. (2014) Microeconomics (6th ed.). London: Worth Publishers.
Mishra, T.(2017, July 10), Solar energy storage manufacturers want lower GST levy on
batteries, The Hindu Business Line, Retrieved on September 8, 2017 from
http://www.thehindubusinessline.com/economy/policy/solar-energy-battery-gst/
article9758357.ece
Nicholson, W. & Snyder, C. (2011). Fundamentals of Microeconomics (11th ed.). New York:
Cengage Learning.
Krugman, P. & Wells, R. (2008). Microeconomics (2nd ed.). London: Worth Publishers.
Pindyck, R. & Rubinfeld, D. (2001). Microeconomics (5th ed.). London: Prentice-Hall
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