FAME II: India's EV sector looks for hope from govt to extend subsidy scheme

The year was 2015. Among the many things Arun Jaitley, then the Union Finance Minister, announced in the Budget, were two sentences on a new scheme to promote the use of electric vehicles (EVs) in India.

As beginnings go, this one was quite modest. Jaitley set aside all of Rs 75 crore for the first year of the scheme, later christened Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India, or FAME. In the first phase that ended on March 31, 2019, a total of Rs 895 crore was spent.

And that’s when the Centre decided to raise the stakes. For the second phase, FAME II, the outlay was increased to Rs 10,000 crore. It proved popular, and the government hiked the demand incentive for electric two-wheelers to Rs 15,000 per kilowatt hour (kWh) of battery or up to 40 per cent of the cost of an electric scooter, up from Rs 10,000 per kWh. The idea was simple: The government would provide incentives to buyers in the form of an upfront reduction in the purchasing price of EVs. Till the end of December 2022, a total of 743,000 electric vehicles were incentivised, and 2,877 EV charging stations were approved under the FAME II scheme.

But this smooth ride hit a rough patch some months ago after the government received emails and letters from a whistle-blower claiming that certain EV makers were not complying with the localisation norms that were part of the scheme. An investigation was ordered by the Ministry of Heavy Industries (MHI) and violations were found. This soured the mood and put into question the extension of the scheme beyond 2024, when the current one ends.

In the immediate aftermath of the investigation, the MHI reduced the 40 per cent maximum incentive cap to 15 per cent for electric two-wheelers (not three-wheelers and buses). It also lowered the demand incentive from Rs 15,000 per kWh of battery to Rs 10,000 per kWh. These amendments came into effect from June 1, 2023.

And the impact was immediate. In June, electric two-wheeler sales saw the first annual decline since 2022. The reason, industry experts say, was the notable increase in retail prices after the incentives ended. The government’s VAHAN dashboard shows that registrations of electric two-wheelers declined 4.1 per cent year-on-year to 42,121 units in June. The drop was a whopping 60 per cent compared with May, when it hit a record of over 100,000 units.

It is important to understand the customer’s point of view when looking at this matter, says Suhas Rajkumar, Founder & CEO of Simple Energy, an electric scooter maker. “The primary purpose of the subsidies was to enable customers to take advantage of several perks when buying an electric two-wheeler.” Now, he says, there are concerns about the affordability of electric two-wheelers.

Fear and foreboding

Kamran Rizvi, Secretary, Ministry of Heavy Industries, said at a recent event in New Delhi that it was too early to comment on the impact of the decreased subsidy scheme for EVs while expressing hope that things would stabilise.

Sohinder Gill, Director General of Society of Manufacturing of Electric Vehicles (SMEV), says the MHI had already announced some months ago that it was about to achieve the sales target of one million in four years and that the subsidy may not continue thereafter. “However, the industry felt that it was too premature to withdraw it, as electric two-wheelers had hardly reached 4.9 per cent adoption rate. Subsidies must be continued at least for three years before tapering off,” says Gill.

“The ground reality is that the Indian market remains price sensitive. With the majority of petrol two-wheelers costing less than Rs 1 lakh, there are lesser chances of customers spending upwards of Rs 1.6 lakh [for an electric two-wheeler] factoring in the total cost of ownership,” Gill says.

Another worry is that there has been no clear indication from the government that there will be a FAME III. But a top government official tells BT, on the condition of anonymity, that the government is indeed considering extending the scheme beyond 2024, but alternative approaches are also being explored to ensure the benefits continue. Another official adds that the MHI has sought inputs from stakeholders, and a proposal is expected to be submitted to the Prime Minister’s Office soon. For the policy, the government is looking at strategies employed by other countries to promote electric mobility, lessons learnt from FAME I and II, and India’s aim of achieving 30 per cent EV penetration by 2030.

Sulajja Firodia Motwani, Chair of FICCI’s Electric Vehicle Committee and Founder and CEO of Kinetic Green Energy and Power Solutions Limited, says the dialogue between government and industry on FAME III is underway. Besides, the industry has recommended that the government could also look at a broad-based production-linked incentive (PLI) scheme for EVs because the earlier one attracted investments from only a handful of OEMs. “Measures like reduction in GST on EV batteries from the current 18 per cent to 5 per cent will free up more capital for businesses. It should also be given priority sector status for lending and the World Bank’s support must be sought to ensure more funds for EVs,” she says.

Not everybody in the EV industry is surprised by the government’s reticence to commit to extending the scheme. Pankaj Sharma, Co-founder and Director of Log9 Materials, a deep tech start-up that just inaugurated one of India’s first battery cell manufacturing lines for EVs, says, “Incentives such as FAME are temporary [measures] to get the industry started. The purpose was to initiate early adoption of EVs to bring the upfront cost of EVs down, which was achieved during the initial period of the scheme. The reason FAME might be scrapped now [is] because it was being bypassed by many Indian EV players.”

Sharma says some firms were not making 60 per cent of the vehicle parts in India, a condition in the scheme. “Over the past few years, the government had to penalise multiple original equipment manufacturers (OEMs) for breaching clauses of the FAME scheme.” He believes, though, that the EV industry will not be majorly impacted if the subsidy ends. “We will see price correction and the focus will be on improved product development,” he adds.

One visible change that the uncertainty over the subsidy could spark is consolidation in the industry. The Indian industry is currently seeing many new entrants, and there are now over 350 players who assemble vehicles using imported components and sell them at a lower price than locally-produced vehicles. These companies may find it tough to survive now with the subsidies ending. Such firms could find the post-subsidy regime hard to navigate. Clearly, this is still an industry in flux.

Rajesh Menon, Director General of the Society of Indian Automobile Manufacturers, says the FAME scheme not only helped increase EV penetration but also, importantly, created an ecosystem that helped the industry thrive. “Continuation of such an incentive-based policy is important till the market matures.”

The test of maturity could well turn out to be the monthly sales numbers for July that could reveal if the dip in June was a one-off or if there is indeed something to worry about. 

@BhutaniChetan