India: Can The Downward Revision Of Subsidies In The Electric 2-Wheelers Cause A Downward Spiral?

Introduction of FAME-II

In furtherance of the Central Government's initiative to popularize electric vehicles in India, the Ministry of Heavy Industries had introduced the Faster Adoption and Manufacturing of Electric (and Hybrid) Vehicles in India ("FAME") Scheme, as a part of the National Mission on Electric Mobility, which was further enhanced in 2019 as FAME-II scheme ("FAME II").

With a plan to disburse INR 10,000 Crore for a period of 3 years commencing from April 1, 2019 (extended until March 31, 2024), the FAME II scheme sought to (a) incentivize advanced battery and registered vehicles, with greater emphasis on providing affordable & environment friendly public transportation options for the masses; and (b) contribute to the phased manufacturing program to grow the in-country manufacturing ecosystem for EVs. Thanks to the EV-related awareness brought in by the Ministry, the scheme has seen a steady increase in the purchase of EV's over the last few years.

Reduction of quantum of Subsidy

Recently, vide notification dated May 19, 2023, and effective from June 1, 2023, the government has made a downward revision to the amount of subsidy available under this FAME-II scheme.

Erstwhile, the subsidy was INR 15,000 per kWh with a maximum cap of 40% of the ex-factory price of the vehicle, allowing a maximum of INR 60,000 that could be claimed as subsidy amount. Consumers purchasing electric 2-wheeler vehicles have benefitted hugely, as the enhanced affordability made electric 2-wheelers extremely attractive.

However, subsequent to the revision after June 1, 2023, there is a subsidy of only INR 10,000 per kWh with a maximum cap of 15% of the ex-factory price of the vehicle, with a cap of INR 22,500 as a maximum subsidy. This reduction in the subsidy available for the electric vehicles is likely to make EVs more expensive in the days to come, for the average consumer.

Why the downward revision?

The official word regarding the reduction in subsidy is attributed to elongating the subsidy scheme over a sustainable period of time by reducing the per-vehicle subsidy. This is also touted as a maturing sign within the budding industry, so that the EV sector players would be less reliant on subsidy and more reliant on the product, to attract consumers.

However, there is reasonable nexus to deep-dive into the efficacy and effectiveness of the subsidy scheme, vis-à-vis the overall intent, which may paint a different picture.

The noise around flouting FAME-II subsidies

The most prominent characteristic of the current FAME II subsidy is that EV makers have to mandatorily contribute at least 50% of the value added to the production of the EV with locally sourced products, to claim the FAME II subsidies. However, compelled by the absence of local manufacturers of components, the EV manufacturers were pushed to importing parts required for production of the EVs, which allegedly amounted to flouting the rules prescribed under the FAME II subsidy.

The Automotive Research Association of India (ARAI), a statutory body under the Ministry of Heavy Industry (MHI), is handling the probe into the allegations of EV makers flouting the local equipment usage norms. Many players of the industry acting as Original Equipment Manufacturers (OEMs) have fallen under the scanner.

Considering that the subsidies are claimed after the benefits have been given to the consumer, investor confidence and credit-worthiness of players in the industry could be dented, until the results of such probe are confirmed and the subsidy amounts are disbursed.

Bundling of the hardware and software

To sell EVs above the price ceiling set by the FAME II subsidy, it is contested that EV makers are unbundling the hardware of the EV from the software, for price manipulation purposes, so that EV makers can find a way around the ceiling. This has the potential for opening up a curated legal battle on the question of principle supply, composite products and whether the software is an integral part of the EV or can it be sold separately.

Impact on the EV Market

From the perspective of anticipated financing and impending acquisitions and collaborations in the EV market, such short-term revision on subsidy and the impending probe could cast a shadow of doubt regarding future plans and could put reins on the fast-moving industry. While it may not be a glaring red-flag for the EV sector just yet, the acquisitions and funding that follow will definitely have an increasingly keener eye on the subsidy regime- its efficacy and compliance.

From the point of view of the consumers, it is a resonating emotion of "opportunity lost", as the attractive subsidy amount no longer persists.

Conclusion

Could the reduction in subsidy amount repulse the average consumer? Was FAME-II too good to be true? Is there something else in store from the government? Is the EV market matured enough to attract consumers without attractive subsidies?

The reaction of this downward revision of the subsidy could answer many such questions.

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