Fate of EV incentives uncertain as sales fall short, subsidy allegedly misused

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As the government’s incentive scheme to promote the sale of electric vehicles enters its penultimate year, falling well short of the targets it sought to achieve, two parliamentary panels have called for an extension of the benefits even as the ministry appears reluctant to do so.

Called the Faster Adoption and Manufacturing of Electric Vehicles in India Scheme (FAME), the second phase was launched in 2019 with the target of supporting the sale of 1.56 million vehicles, including 1 million electric two-wheelers, by March 2022, a deadline that was extended to March 2024. The outlay for the scheme was Rs 10,000 crore.

Only about half the targeted vehicles have been sold till February this year, minister of state for heavy industries Krishan Pal Gurjar said in a written reply in the Rajya Sabha during the Budget Session. This was after a rejig of the incentivisation formula, which increased the total subsidy available to buyers.

Panels want extension

A Parliamentary Standing Committee decried the gap between the target and EV sales and suggested that FAME II should be extended beyond 2024. The committee also sought expansion of the scope of the incentivisation scheme.

Separately, the Committee on Estimates (2022-23) on Evaluation of Electric Vehicle Policy, which presented its report in the Lok Sabha this week, echoed the views of the standing committee. It exhorted the government to come out with a third edition of FAME and increase incentivisation for faster adoption of EVs. This panel suggested that the government offer cash incentives for owners of petrol and diesel vehicles in exchange for EVs.

However, there are mixed views on whether the government should pay heed to the suggestions by the two panels and extend the incentive scheme. EV manufacturers are pushing for an extension, while experts suggest supply-side support instead.

The ministry of heavy industries appears reluctant to continue with FAME and has informed the Committee on Estimates that there is no proposal under consideration to extend the scheme beyond 2024.

The ministry’s reluctance comes amid allegations that manufacturers of electric two-wheelers violated subsidy norms by not meeting mandated levels of localisation. Subsidy payments have been stalled for several months as the government investigates the alleged violations of norms.

The Society of Manufacturers of Electric Vehicles (SMEV) denies the charge of misappropriation of subsidies and says that there has already been a “12 to 15 month” delay in the subsidy payments. All this while, the manufacturers have passed on the subsidy to customers from their pockets. This, they said, has not only squeezed their working capital but has also resulted in a substantial drop in EV sales vis-à-vis the target.

“Most of the debate on localisation is a matter of degrees – most OEMs have struggled to secure local parts that adhere to quality standards but have achieved localisation to a greater or smaller degree providing for availability,” the SMEV said. “All difficulties in the supply of components were a factor of two years of COVID that did not allow supply chains to grow. Most industries have been granted a reprieve in lieu of the COVID years and the EV sector must also be similarly considered.”

Now, as the supply chain moves towards greater localisation, the industry is hoping for a resumption of subsidies and an extension of FAME beyond 2024.

While government support to the EV industry is important, it need not always be in the form of demand subsidy, according to some experts.

“Supply-side challenges need to be addressed and the government subsidy is probably best spent supporting these supply-side challenges (as in production-linked incentive schemes),” said Rahul Mishra, partner (automotive practice) at Kearney. “Any discontinuation that happens should be done with a pre-announced sunset.”

FAME contours  

The Ministry of Heavy Industries & Public Enterprises notified FAME II in March 2019 with an increased outlay of Rs 10,000 crore, which included a spill-over of Rs 366 crore from the first phase. FAME II was applicable from FY20 to FY22 and was later extended to March 2024 to leverage the buzz created by FAME I to boost the uptake of EVs.

In the second edition, 86 percent of the outlay was reserved for demand incentives for the purchase of EVs. The target was to support the sale of 1 million electric two-wheelers, 500,000 electric three-wheelers, 55,000 electric four-wheelers and 7,090 electric buses.

In any case, the ministry had raised the quantum of purchase incentives in 2021, after realising that FAME II was falling way behind target.

Also, the ministry sanctioned 2,877 EV charging stations in 68 cities across 25 states and Union Territories. Another 1,576 charging stations on nine expressways and 16 highways have been sanctioned.

The standing committee, while examining the demand for grants of the ministry of heavy industries for FY24, said the second phase of FAME “should be extended further with new targets, incentives and measures to give boost to the electric mobility in the country. Furthermore, as one of the objectives of transition to electric mobility is to improve the air quality, the Committee is of the view that the Ministry of Environment, Forest and Climate Change may be roped in as a partner player in the implementation of FAME-II.”

Carbon emissions

In India, supporting only 1.56 million EVs may not be enough to reduce carbon emissions, improve air quality and save forex on fossil fuel imports, the standing committee noted.

Total EV sales in the country rose to 1.14 million units as of March 28 in FY23 from 449,022 units in FY22, according to data on the SMEV website.

India produced 22.9 million vehicles including passenger vehicles, commercial vehicles, three-wheelers and two-wheelers in FY22, according to the Society of Indian Automobile Manufacturers. Passenger vehicle sales increased to 3.07 million units from 2.71 million units, it said.

The panel asked the ministry to examine whether it was possible to subsidise private vehicles and consider incentives such as exemption from road tax and registration fee on the purchase of EVs.

The Committee on Estimates, alongside its demand for a third edition of FAME, sought a new national policy for faster adoption of EVs. It suggested increased incentivisation for electric four-wheelers, noting that they were fewer in number than electric two- and three-wheelers because of the price difference between EVs and petrol/diesel vehicles.