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FAME: Will the latest government move kill India’s nascent EV boom?

Electric two-wheelers are driving the EV revolution in India. Cumulative sales of electric vehicles (EVs) in India crossed the one-million milestone for the first time in 2022-23. Two-wheelers accounted for more than 60% of all EV sales with an increase of 183% over 2021-22. A major reason for the rise in electric two-wheeler sales is subsidies.

Now the government is slashing these subsidies and the makers of electric two-wheelers see it as a regressive step which will drag India’s EV revolution, which is led by two-wheelers.

The Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme was launched in April 2015 under the National Electric Mobility Mission, to encourage electric and hybrid vehicle purchase by providing subsidies. Subsidies are meant to bring a price parity between vehicles that have electric motors and fossil fuel-run engines, thereby nudging buyers to go for the cleaner option. Its first phase ran for four years until 2019. Under the second phase, FAME II, which ends this financial year, companies can offer a discount of up to 40% on the cost of locally manufactured vehicles and claim it as a subsidy from the government. FAME II started in April 2019 and would continue until March 2024. Under this scheme, The subsidies could range from ₹15,000-60,000 for a two-wheeler.

Under the FAME-II scheme, the government is increasing the outlay for two-wheelers but cutting the subsidy per vehicle. The budgetary allocation for electric two-wheelers has been enhanced to around Rs 3,500 crore from Rs 2,000 crore, but the subsidy per unit is being reduced to 15 per cent of the ex-factory price from 40 per cent at present. The industry is afraid the subsidy cut will scotch the nascent EV revolution in India. It wants subsidies for several more years.

What does the industry say?
The industry doesn’t think it’s the right time to slash subsidies. Society of Manufacturers of Electric Vehicles (SMEV) has said the sudden reduction of subsidies may lead to a major decline in EV adoption, impacting the entire industry for a considerable period of time.

The ground reality is that the Indian market remains price-sensitive, and the total cost of ownership is not firmly established in consumers’ minds, SMEV Director General Sohinder Gill has said. With the majority of petrol two-wheelers costing less than Rs 1 lakh, there are fewer chances of consumer spending upwards of Rs 1.5 lakh just factoring in the total cost of ownership, he added.

“A gradual transition with sustained subsidies would have been ideal to ensure market growth and reach the international benchmark of 20 per cent EV adoption (presently just 4.9 per cent) before tapering off the subsidies to the customer,” he noted.The share of electric vehicles in total vehicle sales in India is currently around 5%. The government target for EV sales by 2030 is 30% of private cars, 70% for commercial vehicles and 80% for two- and three-wheelers.

Why is the government slashing two-wheeler subsidies?
The government had announced a few months ago that since it was about to achieve the target of one million sales in four years it had set, the subsidies may not continue. The government had no choice but to either suddenly stop the subsidy or somehow manage the rest of the year by greatly reducing the budget and drawing some unspent money from the electric three-wheeler budget to increase the outlay for two-wheelers, and that’s what it has done.

Though the subsidy per vehicle is being slashed, a higher outlay will increase the proliferation of EV two-wheelers as the government would be able to support more vehicles with the funds available. It could lead to a rise in per-unit cost for consumers, but a larger number of buyers would benefit.

“If we continued per unit subsidy at present levels, the allocation for electric two-wheelers will be exhausted in the next two months, despite raising the earmarked amount,” an official had told ET.

The government estimates once the percentage of subsidy is lowered, 10 lakh electric two-wheelers can be supported by FAME till February 2024. That’s when the two-wheeler subsidy may come to an end.

How will it be without the subsidies?
Several experts feel that there is no need to further subsidise EVs, especially two-wheelers, as already more than a million EVs have been subsidised. Also with most state governments having incentives and with prices of cells below the 2021-22 levels, subsidies need to be tapered down for electric two-wheelers and new categories such as quadricycles, e-cycles, commercial vehicles and private buses need to be added.

More than subsidies, what is now needed is an ecosystem of EVs, a government official had told ET. Production-Linked Incentive scheme in automobile and battery cells will help plough enhanced investments into the sector over next three-four years. The emerging electric-mobility ecosystem will bring down costs for manufacturers.

However, the industry thinks it’s still a long way for ecosystem support, such as cheaper battery cells, to lower costs of mass production of two-wheelers.

VoltUp Co-Founder & CEO Siddharth Kabra has stressed the need for taking a holistic view of how the EV sector can grow post the reduction in FAME subsidy. “With the reduction of subsidy to 15 per cent, it is clear that the electric vehicle ecosystem in India is growing rapidly and there is demand. While the immediate impact of subsidy reduction will be a rise in price and lower sales, the government in a way is allowing the industry to become independent,” he told ET recently.

With the cut in subsidies coming into force from June, the two-wheeler makers are looking to tweak products and prices to stay competitive. Leading manufacturers are reportedly rejigging their products by launching lower-spec variants by reducing features and size of batteries.

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