Modi wants Tesla to build cars in India. Making the plan work may not be easy

India has been striving to become a global manufacturing hub, having successfully invited major companies such as Apple to set up as well as expand production in the country.

To further bolster its manufacturing prowess, the South Asian nation has been eyeing Tesla to set up its base in the country. And the carmaker that has appeared reluctant for long is now signaling interest in the market as the Indian government attempts to welcome it by implementing a new EV tariff policy.

Tesla is reportedly recruiting and scouting showroom locations in the country, following a meeting between Indian Prime Minister Narendra Modi and Tesla CEO Elon Musk earlier this month. 

"One thing is for sure, Tesla is coming to India based on the recent news, and the government is also very serious about it," Puneet Gupta, Director for the Indian automotive market at S&P Global Mobility, told CNBC.

India introduced an EV policy last year that proposes to lower the import duties on EVs to 15% from about 70%, with the government set to start accepting applications under this policy before March-end, according to domestic news agency IANS.  

This relaxation only applies to premium EVs priced at over $35,000 and requires investments totaling nearly $500 million and long-term plans to set up local manufacturing.

The EV policy represents a targeted move to appeal to Tesla's business interests, signaling India's readiness to support EV manufacturing, Ammar Master, a South Asia director of Automotive at GlobalData, told CNBC. 

"The Indian government has been proactive in its attempts to lure Tesla into establishing its manufacturing base in India," he said. 

The automaker, however, faces several headwinds to breaking into the world's third-largest auto market.

It's unclear if Tesla's entry makes sense under India's investment scheme, with any plans the automaker might have likely to be rolled out slowly and in a measured way due to several entry barriers, Gupta and other analysts said. 

According to a recent research note by Bank of America, if Tesla were to enter this scheme, it would translate to minimum landed car prices of $40,000. 

At this price, Tesla EVs would enter India's market at a very high price point, above what existing Indian OEMs cater to and implying a small addressable market, BofA said. 

Under the planned EV scheme, Tesla would also need to follow a 3-year timeline for setting up manufacturing facilities in India, reaching a 50% domestic value addition within 5 years. 

Analysts say jumping into this commitment would be premature for Tesla, based on their current price points.

A research note from BNP Paribas on Monday stated that local production in India won't make sense unless Tesla can reduce its vehicle prices to below $30,000 to allow for mass volumes in India.

Meanwhile, Tesla has yet to signal significant interest in setting up a manufacturing base in the country, with its recent job openings consisting of mostly consumer-facing positions. 

Additionally, geopolitical barriers may influence Telsa's decision to produce cars in India under the new Donald Trump administration. In an interview alongside Tesla CEO Elon Musk last week, President Trump said that Tesla manufacturing in India would be "very unfair." 

The company has also been working on completing the production of manufacturing plants in Germany and Texas. 

Given the price and investment challenges, experts told CNBC that Tesla's India foray will start with exporting cars to the market to test the waters first. 

"We expect Tesla's entry into India to be slow and measured, given the low average price point in the market," BNP Paribas said, noting that the company has plans to launch more affordable models later this year. 

Meanwhile, S&P Global Mobility's Gupta said that Tesla will likely push India to tweak its EV tariff policy further, allowing it to start shipping to the country more easily before making any investment promises. 

Some local media sources in India have reported that government may further tweak the EV policy to attract Tesla considers the market. 

"Even if they commit to the current proposal, it will be after six months or so," added Gupta.

However, while the Indian EV market remains small, getting a foothold there could be a valuable endeavor for Tesla as it looks for new markets amid intense competition with Chinese EV makers such as BYD. 

"With the current momentum, we project that Passenger BEV sales in India will reach 1 million units by 2030, accounting for 20% of total sales," said GlobalData's Ammar Master.