FAME 2 subsidy review could disrupt electric two-wheeler sales; stable policies are the key to growth (2023)

A long-term vision and consistent policies along with industry consultation will drive India's ambition to become a major player and market for electric vehicles.

The electric car industry was both a hero and a victim of its own fate. He is repeatedly plagued by excessive promises and frequent violations. See the classic case of subsidies for faster adoption and production of hybrid and electric vehicles (FAME 2) for electric two-wheelers in India. Before the scheme was introduced, the electric two-wheeler segment was largely dominated by sales of low-speed electric scooters, which served the needs of budget-conscious customers to meet their basic transportation needs.

To encourage the use of electric vehicles, the FAME 2 policy introduced a subsidy of Rs 10,000 per kWh of battery capacity capped at 20 per cent of the vehicle price. Subsequently, the subsidy was increased to Rs 15,000 per kWh capped at 40 per cent of the vehicle price. This has boosted the 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 expected to drop, barely experienced a bigger drop.

History of the FAME scheme

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For the uninitiated, the FAME program was part of the National Electric Mobility Mission Plan and was first introduced in 2015 by the Ministry of Heavy Industries and Public Enterprises to encourage and promote the production and sale of environmentally friendly vehicles .

The first phase of the program lasted four years and was completed on March 31, 2019. In Phase 1 (From Fiscal Year 2016 to Fiscal Year 2019), the government planned to invest up to 795 million rupees, but only 795 million rupees were spent. approx. 529 crowns in four years.

FAME 2 subsidy review could disrupt electric two-wheeler sales; stable policies are the key to growth (5)

The second phase or FAME 2 scheme was launched on April 1, 2019 and is expected to be completed by March 2022, which has now been extended to March 2024. The government is planning an expenditure of Rs 10,000 crore in the form of grants.

The idea was to support:

  • One million electric two-wheelers (maximum incentive up to Rs. 20,000)
  • 500,000 electric rickshaws (maximum incentive up to Rs. 50,000)
  • 35,000 electric quadricycles (maximum boost up to Rs. 1.5 lakh)
  • 20,000 hybrid quadricycles (maximum incentive Rs 13,000)
  • 7,090 e-busses (maximum boost up to Rs. 50 lakh)
  • It supports 2700 charging stations with the aim of having at least 1 charging station in a network with a radius of 3 km x 3 km.

In 2021, the government has increased incentives for electric two-wheelers to Rs 15,000 per kWh capped at 40% of the price of the two-wheeler, whichever is lower.

State of affairs subsidies for electric vehicles

Arrived at the present stage, on May 17,FinancialExpress.com broke the newsthat the Ministry of Heavy Industry will reduce the subsidy on electric two-wheelers to Rs 10,000 per kWh capped at 15 per cent of the vehicle price.

This means that the price of electric two-wheelers will become expensive again, widening the gap between electric two-wheelers and their internal combustion engine equivalents, driving consumers towards slow electric two-wheelers or two-wheelers with petrol engines.

FinancialExpress. comspoke to industry stakeholders to try and understand their views.

Uday Narang, founder and chairman of Omega Seiki Mobility, said: “My biggest concern as a businessman, entrepreneur or OEM is that we want government policies that are compelling and consistent. We compare ourselves to China, the United States, Europe and other countries. We also need to see that they have given 10-15 times more subsidies than our government has given to promote electric vehicles. My problem with the current situation is that we are getting into inconsistent politics or changing the way we make decisions very quickly."

FAME 2 subsidy review could disrupt electric two-wheeler sales; stable policies are the key to growth (6)

Samkit Shah, co-founder of Jitendra New EV Tech, an electric vehicle manufacturer, claims that subsidies have now returned to the first phase of subsidies. “In the short term, buyers hoping to buy a vehicle during the heavily subsidized festival season will have to decide in advance. Due to the short review period, a limited number of vehicles will be available on the market and only a limited number of customers will benefit from the existing subsidy.

“However, after June 1, some consumers may reconsider buying an electric car in the short term. However, since the use of electric vehicles is beneficial to customers, there will be no significant impact on the electric vehicle industry in the medium term .The FAME 2 program and all related documents are now available in the public domain.It is specifically stated that it will benefit 10 lakh customers or until the funds available in the two-wheeler segment are exhausted.

The price increase could slow down the growth of electric two-wheelers

Credit should be given to the Government of India where appropriate. So far, the Union government and many progressive state governments have supported the Indian electric vehicle industry, especially the two-wheeler segment, to achieve cost parity.

Initiatives such as GST differential, exemption from road and registration tax, green number plates and different energy prices for, among other things, battery charging have led consumers to view the wheels of two-speed electric vehicles more positively, especially in the scooter segment. However, the review of the FAME 2 grant in the current situation may also have negative consequences.

Sulajja Firodia Motwani, founder of Kinetic Green, said: “We welcome this move and the EV industry is working towards a subsidy-free future. But at the same time, revising the subsidy until we reach cost parity will ultimately hurt the ecosystem. The grant helped customers consider electric two-wheelers over their IC models, as the price difference wasn't huge and it was affordable.

On the other hand, he believes that supporting electric vehicle sales is necessary to ensure that other policies and investments by stakeholders are not disrupted.

FAME 2 subsidy review could disrupt electric two-wheeler sales; stable policies are the key to growth (7)

“If you look at the various schemes that the government is working on (including PLI, Make-in-India and localization attempt), you will not benefit if the prices of electric two-wheelers go up sharply and, therefore, the ask. While many buyers understand that there is a total cost of ownership (TCO) when purchasing an electric two-wheeler compared to an IC two-wheeler, many mid-range buyers don't want to pay a high initial premium in hopes of saving for the future. If you don't have subsidies, electric vehicles are 60 to 70 percent more expensive than their IC counterparts.”

She says India has yet to reach a critical mass of 20-25 percent share of electric vehicles in total car sales. Electric vehicles currently account for only 5 percent of total car sales in India.

Sales of high-speed electric two-wheelers in India have grown significantly in recent years. But in fiscal year 2016, only 20,000 electric two-wheelers were sold in the country, rising to 23,000 units the following year and to 152,000 units in fiscal year 2020.

This also meant that there was hardly any supply chain in the country and therefore the main components were mostly imported. With the industry just starting to see some shifting and adoption and industry stakeholders starting to plan to focus on parts localization, the Covid-19 pandemic has brought its own challenges.

reality check

It's no secret that the FAME 2 subsidy and the growing demand for electric two-wheelers has created an influx of new players trying to win over Indian customers. There are also companies that started their journey at a time when there was no FAME scheme or government subsidies.

“It will lead to price increases for most players in the short term, how much is passed on to customers, every organization will respond to that call. But that's good, at some point there was a demand for electric vehicles in certain sections due to the lower price that made many people consider an e-scooter instead of an IC scooter. These were the early adopters and so it makes sense to give them a higher subsidy for the risk they took. But now there is a certain amount of confidence and maturity in the market,” said Kapil Shelke, founder and CEO of Tork Motors.

FAME 2 subsidy review could disrupt electric two-wheeler sales; stable policies are the key to growth (8)

He believes that customers in the mid-sized motorcycle segment are not as cost-conscious as the scooter segment. Customers in India understand good quality products and are willing to pay more for technologically advanced products. This group of buyers will continue to buy electric vehicles.

“I don't see the FAME 2 policy as just a subsidy, I think the government is motivating the industry to increase localization as much as possible. I think in the future when there is a revision of 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 to limit the maximum subsidy that each player can receive limit . Even in the United States, Tesla, despite being one of the largest companies producing electric cars, does not receive subsidies above a certain limit. So right now I think what's happening in India is whoever has the most capital to spend gets the most subsidy,” added Shelke.

a future without subsidies

Most stakeholders in the sector appear to be opposed to the idea of ​​permanent subsidies. In fact, most of them are already working on business strategies without considering any kind of incentives and working on financing arrangements, pay-per-use models or Mobility as a Service (MaaS).

But a long-term vision and consistent policies along with industry advice will drive India's ambition to become a major player and market for electric vehicles. The government should also take into account the sincere efforts and investments of serious players to ensure a favorable environment for the electric vehicle industry.

“It's not about premium or mass models. This affects the battery capacity of the model. Consumers will choose the right product based on their daily needs. Previously, they used the subsidy for higher capacity battery models even if they didn't need a larger battery, resulting in a greater range per charge, but now there will be a review of the question,” says Shah.

Narang believes that the government still has a role to play, “but it is still too early to reduce or abolish subsidies. If you look at the electric truck we are working on, we are already preparing for a subsidy-free future. We know there was no subsidy for electric trucks but still we made them and we are working to bring the price down to Rs 8-10 lakh.”

“I think the reduction of subsidies is still premature and I hope the government can consider giving subsidies for at least the next 3-4 years,” concludes Motwani.

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