How Will The New FAME Subsidy Program Affect The EV Industry?

The government’s decision to reduce FAME II scheme subsidies resulted in a sharp decline in EV sales in June. But the industry remains hopeful for ongoing support as discussions about extending FAME and other measures continue

The Centre then made the decision to up the ante. The expenditure rose to Rs 10,000 crore for the second phase, FAME II. It was well received, so the government increased the demand incentive for electric two-wheelers from Rs 10,000 per kWh to Rs 15,000 per kilowatt hour (kWh) of battery, which is up to 40% of the price of an electric scooter. The concept was straightforward: The government would give incentives to consumers by lowering the upfront cost of EV purchases. The FAME II program approved 2,877 EV charging stations and provided incentives for 743,000 electric vehicles in total through the end of December 2022.

But a few months ago, this smooth ride hit a rough patch when the government received emails and letters from a whistle-blower alleging that specific EV manufacturers were not abiding by the localization standards that were required by the program. The Ministry of Heavy Industries (MHI) requested an investigation, and violations were discovered. This dampened the atmosphere and raised concerns about continuing the program after the current one expires in 2024.

Following the investigation, the MHI reduced the 40% maximum incentive cap for electric two-wheelers (but not three-wheelers or buses) to 15%. Additionally, it reduced the demand incentive from Rs. 15,000 to Rs. 10,000 per kWh of battery. The implementation of these changes began on June 1, 2023.

And it had an immediate effect. Sales of electric two-wheelers fell in June for the first time since 2022. According to industry experts, the significant rise in retail prices following the termination of the incentives was the cause. According to the government’s VAHAN dashboard, the number of electric two-wheeler registrations fell by 4.1% from the previous year to 42,121 units in June. When compared to May, when it reached a record of over 100,000 units, the decline was a startling 60%.

Suhas Rajkumar, the founder and CEO of Simple Energy, a manufacturer of electric scooters, argues that it is crucial to consider the viewpoint of the customer when examining this issue. The main goal of the subsidies was to make it possible for customers to benefit from a number of benefits when purchasing an electric two-wheeler. He claims that recent worries about the affordability of electric two-wheelers have arisen.

FAME Subsidy Program: Dread and Dreadfulness

At a recent event in New Delhi, Kamran Rizvi, Secretary, Ministry of Heavy Industries, said that it was too early to comment on the effects of the reduced subsidy scheme for EVs but expressed hope that things would stabilize.

According to Sohinder Gill, Director General of the Society of Manufacturing of Electric Vehicles (SMEV), the MHI had already announced a few months prior that the subsidy might end once it reached its goal of one million sales in four years. “However, the industry believed that it was premature to withdraw it as the adoption rate for electric two-wheelers had only just surpassed 4.9%. Before tapering off, subsidies must be maintained for at least three years, according to Gill.

The Indian market is still price sensitive, which is the actual situation. Given that the majority of petrol two-wheelers are less than Rs 1 lakh, Gill says there are fewer chances that customers will spend more than Rs 1.6 lakh on an electric two-wheeler when the total cost of ownership is taken into account.

Another concern is that the government hasn’t made it clear that FAME III will take place. However, a senior government official tells BT under the condition of anonymity that while the government is considering extending the program past 2024, other strategies are also being looked at to ensure the benefits continue. A proposal is anticipated to be submitted to the Prime Minister’s Office soon, according to a second official who notes that the MHI has solicited input from stakeholders. The government is considering FAME I and II lessons, other nations’ electric mobility promotion strategies, and India’s goal of 30% EV penetration by 2030 when developing the policy.

The conversation between government and business regarding FAME III is currently taking place, according to Sulajja Firodia Motwani, founder and CEO of Kinetic Green Energy and Power Solutions Limited and Chair of FICCI’s Electric Vehicle Committee. A broad-based production-linked incentive (PLI) scheme for EVs has also been suggested by the industry because the previous one only attracted investment from a small number of OEMs. “Measures like lowering the GST on EV batteries from the current 18% to 5% will give businesses more capital. In order to ensure more funding for EVs, the World Bank’s support must be sought, she adds. It should also receive priority sector status for lending.

The government’s hesitation to commit to extending the scheme has not surprised everyone in the EV sector. “Incentives such as FAME are temporary [measures] to get the industry started,” says Pankaj Sharma, Co-founder and Director of Log9 Materials, a deep tech start-up that recently opened one of India’s first battery cell manufacturing lines for EVs. The goal was to encourage early EV adoption in order to reduce the upfront cost of EVs, which was accomplished during the program’s first phase. Due to the fact that many Indian EV players avoided it, FAME may now be scrapped.

According to Sharma, some businesses were not meeting the scheme’s requirement that 60% of the vehicle parts be produced in India. The government has had to fine numerous original equipment manufacturers (OEMs) in recent years for violating the FAME scheme’s rules. However, he thinks that if the subsidy ends, the EV industry won’t be significantly affected. “Price correction will occur, and the emphasis will be on better product development,” he continues.

Consolidation in the sector is one obvious change that the subsidy uncertainty could bring about. There are currently over 350 players who assemble vehicles using imported components and sell them for less than locally produced vehicles in the Indian market, which is currently seeing a lot of new entrants. With the subsidies ending, it might be difficult for these businesses to survive. Such companies might find it challenging to navigate the post-subsidy regime. It is obvious that this is still a changing industry.

The FAME scheme, according to Rajesh Menon, Director General of the Society of Indian Automobile Manufacturers, not only increased EV penetration but also—and this is crucial—created an ecosystem that supported the industry’s growth. “Until the market reaches maturity, such an incentive-based policy must be maintained,”

The monthly sales figures for July may end up being the true test of maturity because they will show whether the decline in June was an anomaly or if there is legitimate cause for concern.

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