Bajaj Auto managing director Rajiv Bajaj was spot on when he said in a media interview this week that no industry could be built only on the back of subsidies and that businesses must learn to survive without a crutch. Bajaj also asserted that subsidies masked reality, blunted innovation, and disrupted strategy. The merit of his argument notwithstanding, one should consider the ground realities as far as the electric vehicles (EV) industry is concerned. The difference in the price of an electric vehicle and an ICE (internal combustion engine) is so large that it would be hard to persuade buyers to pick up an EV unless the cost is subsidised. In addition, charging infrastructure is inadequate, adding to the range anxiety. As such, while the government may be justifiably upset about the alleged misuse of incentives by some manufacturers, it must continue to subsidise EVs for some more time. The extent of the subsidy can be brought down gradually as the EV ecosystem evolves and the production of batteries and other components picks up locally. Over time, localisation would help lower the cost of production even as charging infrastructure gets built.
The fact is the incentives have helped drive up sales of EVs in the past few years. Electric two-wheelers have sold in big numbers and clocked volumes of 716,000 in FY23, up from 235,000 in the previous year and less than 25,000 in FY20. The growth in sales of electric cars has been equally fast; while volumes sold in FY21 were below 6,000, this jumped to a shade below 51,000 in FY23. It is unlikely that the growth trajectory would have been as impressive in the absence of incentives both under the Centre’s FAME schemes as also subsidy support from many state governments.
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The subsidy today accounts for a fairly large share of the cost to the buyer. For example, analyst say while the on-road price of the premium version of the TVS iQube is Rs 1.72 lakh, the cost to the consumer is Rs 1.18 lakh; while the incentive accounts for Rs 51,000, the rest is the insurance cost of Rs 7,000. Needless to say, electric vehicles cost way more than ICE vehicles. The Rs 1.72 lakh TVS iQube compares with a price of Rs 93,550 for the Honda Activa FI. To be sure, the total cost of ownership over 50,000 km would be lower for the iQube at Rs 1.81 lakh compared with Rs 2.32 lakh for the Activa. This is assuming the two-wheeler runs 10,000 km a year, petrol costs Rs 100 per litre, and the replacement cost of the battery is $150 per kWh. In the absence of an incentive, it would be difficult to coax a customer to opt for an electric vehicle.
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The Committee on Estimates has expressed concern that withdrawing support would result in a significant price escalation in EVs and some units may need to shut down. It has called for the FAME II scheme to be extended for two more years. That should be useful for players to strengthen their manufacturing capacities and to incentivise buyers. At the end of the day, if India is to meet its clean energy targets, some financial support to EV makers would be needed. The government must ensure the subsidies are not misused and also that the manufacture of batteries and components is indigenised.