E2W Subsidy Phase-out: Manufacturers will be forced to innovate and launch cheaper models

It is obvious that the price of E2W will increase in the coming days since most OEMs are unlikely to absorb the entire reduction in subsidy.

India’s electric vehicle subsidy regime, which has been offering demand incentives, may have already begun its race to the finish. Earlier this week, the government indicated that it was mulling a significant reduction in the quantum of subsidy available for electric two-wheelers (E2W) and that it has no plans to extend the subsidy scheme beyond 2024.

Every incentive scheme must end at some point and this one was anyway valid only till next April. Expectedly, the development drew contrasting reactions from manufacturers. One set of E2W original equipment manufacturers (OEMs) has criticised the slow phase-out of the subsidy regime and cautioned that sales of electric vehicles will be impacted as would the government’s aim to reduce emissions. The other set welcomed the move, saying that the industry must find its own feet and that any subsidy regime disincentivises innovation and efficient manufacturing practices. The subsidies were being paid under the second edition of the Faster Adoption and Manufacturing of Electric Vehicles (FAME II) scheme.

It is obvious that the price of E2W will increase in the coming days since most OEMs are unlikely to absorb the entire reduction in subsidy. We may also see OEMs being forced to innovate and perhaps introduce cheaper vehicles, fitted with smaller batteries, more basic software options, etc to retain margins. Whether the withdrawal of subsidies will hurt sales of E2W in any significant manner, though, remains to be seen. The government was any way left with little option but to phase out the subsidies as the total budgetary allocation for E2W categories (Rs 2,000 crore) had already been exhausted due to high demand. Continuing the scheme meant diverting the funds meant for electric three-wheelers.

Unnamed senior officials of the Ministry of Heavy Industries were quoted by several news reports that the FAME II outlay would be enhanced by about Rs 1,500 crore for the remaining part of the current fiscal but subsidies for each eligible E2W would be capped at Rs 10,000 per KwH of battery capacity. In addition to this cap, the subsidy would be equal to or lower than 15 percent of the ex-factory price of the two-wheeler. This is a substantial reduction in the total subsidy amount as up to 40 percent of the ex-factory price is being subsidised currently.

Subsidy Sunset Inevitable

While government support for the fledgling electric vehicle (EV) industry is important and more specifically for the E2W given the large proportion of two-wheeler buyers, a sunset for the subsidy regime is not necessarily bad. One, long-running subsidies distort the market and disincentivise innovation. Two, support from the government need not necessarily always be on the demand side. Supply-side support will work equally well and the government is already talking about expanding the production-linked incentive scheme for electric vehicles. Three, the alleged subsidy misappropriation by some E2W OEMs and the subsequent flip-flops by the government over this issue has muddied the waters considerably.

In this scenario, the government was hardly expected to extend the FAME II scheme beyond 2024 —there has already been one extension. Besides, the reasoning given for subsidy reduction stands on its own merit: the allocation for E2W has already been utilised and some money meant for electric three-wheelers will be diverted to the two-wheeler segment to enable the payout of subsidies for a few more months.

Subsidy Pitfalls

The gradual withdrawal of subsidies for E2W comes after lazy policy-making, inefficient implementation and the brazenness of vehicle manufacturers in wrongfully availing of subsidies created a mess. The situation had already become farcical, with the government scrambling to penalise some manufacturers of electric two-wheelers (E2W) retrospectively and even in this, levying differential penalties on the OEMs based on either subsidy misappropriation or overpricing of products.

As per FAME II, OEMs were to pass on the subsidy (up to 35-40 percent of the vehicle cost in case of E2W) to the customer at the point of purchase and claim this from the government. But this was subject to mandatory localisation in E2W of up to 50 percent. The subsidy release by the government would only happen once its own certified testing agencies had checked a random sample of products for compliance with all the conditions for availing subsidy by the OEMs.

But allegations of lower-than-mandated localisation and wrongful subsidy claims have marred the entire scheme. Now, as a local ecosystem has been established for critical parts like batteries, perhaps the cost of making E2W will also come down in the near future, thereby reducing the impact of subsidy withdrawal for at least entry-level models.

Therefore, it is only right that the subsidy regime gradually fades into the sunset and the government consider increasing incentives on the supply side.

Sindhu Bhattacharya is a journalist based in Delhi who writes on a range of topics in business and economy. Views are personal, and do not represent the stand of this publication.