Mint Explainer: The EV incentive conundrum

Stakeholders are eager to know whether the critical support to incentivize demand for these expensive but environmentally friendly vehicles will be reduced or scrapped. There are speculations that subsidies may be tapered in favor of a smaller outlay under a new or extended version of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles or FAME-II scheme.

Government officials with direct knowledge of the discussions told Mint on Wednesday that could be the case. For now, uncertainty surrounds the fate of electric vehicle (EV) incentives, with the ₹11500 crore FAME-II scheme set to expire this financial year, sparking discussions about the potential transition to FAME-III.

Adjusting incentives

In June 2023, the Indian government substantially reduced the subsidies for electric two-wheelers under the FAME-II scheme. These vehicles, which benefited the most from the scheme, saw their subsidy rates cut from a generous 40% of the ex-showroom prices to just 15% of the ex-factory prices. This decision, although anticipated by the industry, led to a challenging adjustment period for the industry. The government aimed to reallocate resources to support its ambitious goal of subsidizing 1 million electric scooters. This involved rejecting subsidy claims for over 400,000 e-scooters on the grounds of non-compliance with the government's localization requirements. Despite these reductions, subsidy support under FAME-II has been extended to over 12.20 lakh electric scooters, surpassing the government's initial target.

To maintain sales momentum, aggressive pricing strategies, such as deep discounting, were adopted by OEMs such as Ola Electric, the country's largest e-scooter maker at present.

However, the immediate aftermath of the subsidy cut saw a notable drop in e-two-wheeler sales to 46,000 units monthly from an average sales rate of 66,600 units in the first half of 2023. This decline underscores industry concerns that reduced subsidies could slow down the adoption pace of EVs, signaling a critical moment for the sector's growth trajectory.

What we know about FAME-III 

The spotlight is now on the discussions surrounding the extension or replacement of the FAME-II scheme. This next phase aims to align India with the global trend of tapering off EV subsidies, proposing a structure that mirrors its predecessor, FAME-II, albeit with a reduced quantum and broadening its scope to include new vehicle categories like e-trucks and inter-city buses. Additionally, there's a push to include a dedicated fund for setting up charging infrastructure within the framework of the scheme.

Government officials hint at a more rapid reduction in subsidy timeline, shifting from a previously anticipated five-year plan to two-three years. To be sure, various EV industry representations to the government have sought a five-year extension to the FAME-II scheme. If such an extension is provided (beyond the extension likely to be announced immediately after March 31), it may likely be announced in the full budget after the elections. This accelerated pace raises concerns among industry experts about potential disruptions and challenges for manufacturers.

Automakers have voiced apprehensions about the lack of clarity disrupting electric vehicle adoption, which is grappling with stagnation. In December 2023, electric two-wheeler registrations rose 17% year-on-year, but declined 17% month-on-month to 75,366 units. In the second half of 2023, the average monthly run rate at 71,250 units was lower than 72,535 units for 2022.

With such trends, time and certainty emerge as crucial factors for manufacturers and ecosystem players to adapt swiftly to changing market conditions and boost the momentum towards electric mobility in India.

Focus on affordability

In response to the stagnation in EV sales, automakers have strategically pivoted to focus on affordability to stimulate growth.

A wave of affordably-priced electric vehicles has flooded the market, accompanied by price cuts to appeal to a broader consumer base. However, the looming uncertainty surrounding FAME-III adds a layer of complexity, making strategic planning challenging for manufacturers in an already competitive industry.

Amid the uncertainty, industry leaders are also advocating for the continuity of subsidies, stressing the need for a gradual reduction rather than abrupt discontinuation, acknowledging that while subsidies are not the sole lifeline for the industry, their abrupt removal could result in one or two years of stunted growth.

Potential incentives for new segments

Looking ahead, FAME-III may extend its reach beyond two-wheelers, three-wheelers, and commercially run four-wheelers. Discussions include incentives for inter-city buses and e-trucks on an experimental basis. This expansion signals a strategic move to diversify the electric vehicle market and promote cleaner mobility solutions across various segments.

Road ahead

The industry expects clarity around the continuation of incentives by mid-March. The proposed changes in FAME-III suggest a nuanced approach to subsidy strategy, emphasizing targeted growth and a diversified market. 

However, the uncertainty and the possibility of market disruptions underscore the critical need for clear communication and strategic foresight in the transition process. As the sector stands on the cusp of significant change, stakeholders are preparing for a period of transformation that could redefine the landscape of electric mobility in the coming months.