The electric vehicle industry has been a hero and a victim of its own fate. Time and again, it has been impacted due to over-promises and frequent under-achievement. Look at the classic case of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME 2) subsidies for electric two-wheelers in India. Before the scheme was introduced the electric two-wheeler segment was mostly dominated by sales of low-speed electric scooters, which fulfilled a need for price-conscious customers to meet their basic commuting needs.
To encourage the uptake of electric vehicles, the FAME 2 policy introduced a subsidy of Rs 10,000 per kWh of battery capacity with a maximum cap of 20 percent of the vehicle cost. The subsidy was later increased to Rs 15,000 per kWh with a maximum cap of 40 percent of the vehicle cost. This helped drive sales of electric two-wheelers in India, especially in the scooter segment. But on the other hand, the price of lithium-ion batteries which was predicted to drop, hardly saw any big reduction.
FAME scheme history
For the unversed, the FAME scheme was a part of the National Electric Mobility Mission Plan, and was first introduced in 2015, by the Ministry of Heavy Industries and Public Enterprises to incentivise and promote the production and sales of eco-friendly vehicles.
The first phase of the scheme was for a period of four years and was completed on March 31, 2019. In phase 1 (FY2016 to FY2019) the government aimed to invest up to Rs 795 crore, but only around Rs 529 crore was spent in the four years.
The second phase or FAME 2 scheme was launched on April 1, 2019 and would have been completed by March 2022, which has now been extended till March 2024. The government is planning an outlay of Rs 10,000 crore in the form of subsidies.
The idea was to support:
- A million electric two-wheelers (max incentive upto Rs 20,000)
- 500,000 electric rickshaws (max incentive upto Rs 50,000)
- 35,000 electric four-wheelers (max incentive upto Rs 1.5 lakh)
- 20,000 hybrid four-wheelers (max incentive of Rs 13,000)
- 7,090 e-buses (max incentive upto Rs 50 lakh)
- Support 2,700 charging stations with an objective have to at least 1 charging station in a grid of 3km x 3km radius.
In 2021, the government hiked the incentive on electric two-wheelers to Rs 15,000 per kWh with a maximum cap of 40 percent of the cost of the two-wheeler whichever was lower.
Current status of EV subsidies
Coming to the present scenario, on May 17, FinancialExpress.com broke the news that the Heavy Industry Ministry would bring down the subsidies on electric two-wheelers to Rs 10,000 per kWh with a maximum cap of 15 percent of the vehicle cost.
This means, the price of electric two-wheelers will again become expensive, increasing the gap between them and equivalent internal combustion engine counterparts, and thus pushing consumers towards low-speed e-two-wheelers or petrol-powered two-wheelers.
FinancialExpress.com spoke to industry stakeholders to try and understand their views.
Uday Narang, Founder & Chairman, Omega Seiki Mobility said, “My biggest concern as a businessman, entrepreneur or an OEM is that we want a policy from the government that is coercive and consistent. We compare ourselves to China, United States, Europe and other countries. We also have to see that they have given out 10-15 times the subsidies our government has given towards the promotion of electric vehicles. My problem with the current situation is that we are getting into an inconsistent policy or decision making changing on a very rapid basis.”
Samkit Shah, Co-Founder, Jitendra New EV Tech, an electric vehicle manufacturer states the subsidies have now returned back to the first phase of subsidies. “In the short-term customers who were waiting to purchase a vehicle during the festival season with heavy subsidies will need to advance their decision. Due to the short time period for the revision, there will be limited stock of vehicles available in the market, and only a limited number of customers will benefit from the existing subsidy.”
“But post June 1, some consumers may reconsider purchasing an electric vehicle in the short run. However, in the medium term, as the use of electric vehicles proves beneficial to customers, there will not be a major impact on the EV industry. The FAME 2 programme, and all related documents are already available in the public domain. It is specifically mentioned to benefit 10 lakh customers or until the available funds last in the two-wheeler segment.”
Price hike could deter growth of electric two-wheelers
One has to give credit to the Indian government where it is due. Till now, the Union government and many forward-looking state governments have provided support to the Indian EV industry especially the two-wheeler segment to bring about cost parity.
Initiatives like differential GST rate, waiver of road taxes and registration, green number plates and differential energy pricing for battery charging among others have helped consumers look at electric two-wheelers, especially in the scooter segment more positively. But the revision of the FAME 2 subsidy at the current juncture could also have negative implications.
Sulajja Firodia Motwani, Founder, Kinetic Green says, “We welcome the move and the EV industry is working towards a future without subsidies. But at the same time, the revision in the subsidy till we have not reached cost parity will ultimately hurt the ecosystem. The subsidy was helping customers to consider electric two-wheelers over their IC-counterparts as the price difference was not much and was affordable.”
On the other hand, she believes that there is a need to support electric vehicle sales to ensure other policies and investments made by stakeholders do not get disrupted.
“If one looks at the various schemes that the government has worked upon – PLI, Make-in-India and push towards localisation among others – will not benefit if the prices of electric two-wheelers go up significantly and hence the demand comes down. Though there is a total cost of ownership (TCO) understood by many customers when buying an e-two-wheeler compared to an IC-two-wheeler, many middle-class customers don’t want to pay a large initial premium expecting savings in the future. If you don’t have any subsidy EVs are 60-70 percent more expensive than their IC-counterparts.”
She says that India still hasn’t reached the critical mass of 20-25 percent penetration of EVs in overall automotive sales. Electric vehicles at present, just contribute 5 percent of the total auto retail in India.
The sales of high-speed electric two-wheelers in India have grown significantly in the last few years. But in FY2016 only 20,000 electric two-wheelers were sold in the country, growing to 23,000 units the next year and reaching 152,000 units by FY2020.
This also meant there was hardly any supply chain existing in the country, and hence, key components were usually being imported. What’s more, when the industry was just starting to see some movement, acceptance, and industry stakeholders started planning to focus on localisation of parts, the Covid-19 pandemic brought forth its own set of challenges.
Reality check
It is no secret that the FAME 2 subsidy and the growing demand for electric two-wheelers saw an influx of new players trying to woo Indian customers. Then there are companies who began their journey in an era when FAME scheme or state government subsidies didn’t exist.
“In the short-term, this will lead to a price increase by most players, how much of it will get passed to the customers, each organisation will take that call. But that’s a good thing, there was a demand for electric vehicles at some point by certain sections due to the deflated price for which many people were considering an e-scooter over an IC-scooter. These were the early adopters and hence giving them a higher subsidy for the risk they took makes sense. But now there is a certain level of confidence and maturity in the market,” says Kapil Shelke, Founder & CEO, Tork Motors.
He believes that the customers in the mid-size motorcycle segment are not as cost-sensitive as the scooter segment. Customers in India understand good quality products and are ready to pay a premium for technologically advanced products. This set of customers will continue to purchase electric vehicles.
“I don’t see the FAME 2 policy just as providing subsidy, I believe the government is motivating the industry to increase localisation as much as possible. I think in the future when there is a revision in FAME 2 or the introduction of FAME 3, the government should look at the PLI scheme and use some of its guidelines such as the need for a cap on the maximum subsidy each player can get. Even in the United States, Tesla despite being one of the biggest electric car companies does not get a subsidy beyond a certain cap. So currently I think what is happening in India is that whoever has the largest capital to burn is making the most of the subsidy,” adds Shelke.
Future without subsidies
Most industry stakeholders appear to be against the idea of permanent subsidies. In fact, most of them are already working on business strategies without taking into account any kind of incentive and working on financing schemes, ‘pay-per-use’, or mobility-as-a-service (MaaS) models.
But a long-term vision and consistent policy together with industry consultations will drive India’s ambition to become a significant player and market for electric vehicles. The government also needs to take into account the genuine efforts and investments being made by serious players and thus provide a conducive environment to the EV industry.
“It is not about mass-market or premium models. It is about the battery capacity of the models, which is impacted. Consumers will choose the right product based on their daily usage needs. Earlier, they were taking advantage of the subsidy for higher battery capacity models, even if they didn’t require a higher battery pack resulting in a higher range per charge, but now there will be a revision in demand,” says Shah.
Narang believes that there is still a role for the government to play, “but it is too early to reduce or remove subsidies. If you look at the electric truck that we are working on, we are already preparing for a future without subsidies. We know that there were no subsidies on e-trucks, but we still built it and are working on bringing the price down to the Rs 8-10 lakh range.”
“The reduction in subsidies I think is still premature, and I hope the government can consider providing subsidies at least for the next 3-4 years,” concludes Motwani.
