Government Cuts Subsidies Under FAME II Scheme: Impact On The Sector & Players
The Indian government has been steadfast in its commitment to promoting the electric vehicle (EV) industry, implementing various measures to support its growth. These initiatives, including the Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme, have played a crucial role in fostering the industry's development. However, the government's recent decision to reduce subsidies under the FAME II scheme for two-wheeler EVs has raised concerns about its impact on the sector and its players.
The FAME II Scheme and its Objectives
To promote the electric vehicle industry, the government approved Phase II of the FAME Scheme with a budget of Rs. 10,000 Crore. The scheme primarily focuses on creating demand for EVs, allocating the majority of the budget for the Demand Incentive component. Additionally, the scheme incentivises the charging infrastructure, which is a crucial factor that determines the performance of the sector as a whole. Since the adoption of FAME, the two-wheeler EV segment in terms of market penetration has grown from 0.1 per cent in FY ‘20 to 5 per cent in FY ‘23.
Government's Decision: Subsidy Reduction
In a recent notification by the Ministry of Heavy Industries, the government announced a reduction in the subsidies provided under the FAME II scheme for electric two-wheelers. The demand incentive has been decreased from Rs. 15,000 per kWh to Rs. 10,000 per kWh, and the cap on incentives has been lowered from 40 per cent of the ex-factory price to 15 per cent. The Ministry of Heavy Industries has recommended this subsidy cut to an inter-ministerial panel, with the aim of offering benefits to a larger number of buyers. However, this reduction in subsidies may result in electric two-wheelers becoming more expensive.
The impacts of the subsidy cut in the Indian two-wheeler EV sector
Increased prices: The subsidy cut will lead to an increase in the prices of electric two-wheelers. This is because the manufacturers will have to pass on the cost of the subsidy to the consumers. This could make electric two-wheelers less affordable for many people.
Reduced demand: The increase in prices could lead to a reduction in demand for electric two-wheelers. This is because many people may not be willing to pay more for an electric two-wheeler. This could slow down the growth of the electric two-wheeler market in India.
Focus on R&D: The subsidy cut could force manufacturers to focus more on R&D in order to reduce the costs of electric two-wheelers. This could lead to the development of new technologies and innovations that could make electric two-wheelers more affordable and attractive to consumers.
Overall, the subsidy cut is a challenge for the Indian two-wheeler EV sector. More focus on R&D and building infrastructure will help in bringing down the costs.
Implications for the Two-Wheeler EV Sector
Affordability Challenges
The reduction in subsidies may lead to an increase in the upfront cost of electric two-wheelers. Affordability has been a key driver of EV adoption in India, and any significant price hike may deter potential buyers, especially in price-sensitive segments of the market, especially below 1 lakh price point. As a result, the transition to electric two-wheelers may slow down, impacting the growth of the sector in the short to medium term. The decrease in subsidies is likely to impact demand and sales of electric two-wheelers. With reduced financial incentives, customers may hesitate to switch from conventional vehicles to EVs, particularly if the price difference becomes significant. This could slow down the overall demand for electric two-wheelers, affecting the growth prospects of manufacturers and the industry as a whole.
Competitiveness of EV Manufacturers
EV manufacturers operating in the two-wheeler segment will face challenges due to the reduced subsidies. With higher prices, they may struggle to compete with conventional two-wheelers that offer lower upfront costs. This could affect the growth and market share of EV manufacturers in the country. The reduced subsidies may create an uneven playing field when compared with ICE counterparts, making it harder for EV manufacturers to attract customers in a price-sensitive market.
Battery Technology and Innovation
The industry may need to invest more in R&D in the battery technology segment and innovate to bring down costs in the absence of subsidies. More innovation should be taken as a necessity for cost reduction. With proper streamlining of the battery innovation, several avenues can be achieved as it is the only component that has the maximum cost in a vehicle unit.
Charging Infrastructure Development
A vibrant charging infrastructure is crucial for the widespread adoption of EVs, including two-wheelers. The reduction in subsidies may impact investments in charging infrastructure development. Stakeholders, including government agencies and private companies, may adopt a cautious approach to infrastructure expansion if they perceive a potential decline in demand for electric two-wheelers. This could hinder the development of a robust charging network, creating a barrier to the adoption of electric two-wheelers.
Here are some additional thoughts on how the industry players can overcome the challenges posed by the subsidy cut
Invest in R&D: As mentioned above, the subsidy cut could force manufacturers to focus more on R&D in order to reduce the costs of electric two-wheelers. This could lead to the development of new technologies and innovations that could make electric two-wheelers more affordable and attractive to consumers.
Focus on Brand Building
The truth of the market is that the end customer is still driven by brand loyalty. It is proven in the case of traditional petroleum based two-wheeler automobile sector. Customers do prefer to buy a particular brand of motorbikes and scooters. Building a brand is dependent on the amalgamation and seamless functioning of several functions, such as offering high-quality products, efficient customer service, better brand visibility and recallability. In order to compete in the post-subsidy regime, manufacturers will need to focus on producing high-quality electric two-wheelers that are reliable and durable. Manufacturers will also need to improve customer service in order to retain customers and attract new ones. This means providing excellent after-sales support and making it easy for customers to get repairs and maintenance.
Partner with other companies: Manufacturers can also partner with other companies to overcome the challenges posed by the subsidy cut. For example, they could partner with charging infrastructure companies to provide convenient and affordable charging solutions for their customers.
By taking these steps, the industry players can overcome the challenges posed by the subsidy cut and continue to grow the electric two-wheeler market in India.
Article has been authored by Rohit Vadera, CEO, PURE EV
