Promoting EV Sales: FAME scheme targets need to be more realistic

The targeted electric vehicles, an overwhelming 10 lakh were to be E2W and the outlay for FAME II was Rs 10,000 crore.

India’s electric vehicle push has suffered multiple setbacks due to lazy policymaking, inefficient implementation and the brazenness of vehicle manufacturers in wrongfully availing of subsidies. The situation has become farcical now, with the government scrambling to penalise manufacturers of electric two-wheelers (E2W) retrospectively and even in this, levying differential penalties on the original equipment manufacturers (OEMs) based on either subsidy misappropriation or overpricing of products. And, the entire policy muddle has hurt the industry. Sales of E2W, in particular, have fallen and the overall EV sales target is nowhere near realisation.

The story, full of twists and turns, started at the launch of the second edition of Faster Adoption of Electric Vehicles (FAME II), a purchase incentive scheme for EVs, in 2019. The goal of the scheme was simple: OEMs would 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 it from the government. But payment of subsidy was subject to mandatory localisation in E2W of up to 50 percent. The subsidy release by the government would also 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.

Allegations of Misappropriation

Everything went well between 2019 and 2022. Then a flurry of anonymous emails, detailing subsidy misappropriation by a few E2W OEMs landed in the inboxes of key officials of top government officials. These particular OEMs had not, allegedly, complied with localisation norms but had availed of the subsidy nevertheless. If this was true, how did the government’s own testing agencies fail to flag the issue for three years?

As the OEMs cried themselves hoarse about the absence of a domestic ecosystem for sourcing parts for making their electric vehicles, the government stopped subsidy payments and subsequently launched a probe. In various representations to the government and assertions to the media, the E2W OEMs cited multiple conspiracy theories: the anonymous emails were sent by fossil fuel vehicle manufacturers who feared a dent in sales; the government mandated high localisation knowing well that there was hardly any ecosystem present locally given the lack economies of scale; and that only market leaders were targeted though all OEMs had misappropriated subsidies.

As the government stopped subsidy payments pending the conclusion of the probe into the allegations, the OEMs continued to pay subsidies from their own pockets to keep up sales while demanding the resumption of the payments from the government. Now, nearly one year after the probe started, there is again an attempt to obfuscate the issue. The International Centre for Automotive Technology (ICAT), one of the official testing agencies, has cleared six E2W OEMs and said that no “serious” violations of localisation norms had been found. It also said that the government would soon start disbursement of subsidies, but refused to clarify the issues surrounding other OEMs and whether they were indeed indulging in subsidy misappropriation.

Meanwhile, another bunch of E2W OEMs have begun offering a refund on some accessories (such as chargers) sold to customers bundled with the vehicles, since this also violated subsidy norms. But the subsidy misappropriation allegations against the third set of OEMs - market leaders accounting for the bulk of sales volume - are still to be decided. There are indications that these OEMs will be asked to pay back the subsidies they have already availed earlier.

Sales Lag Target

Amid all this back-and-forth between the government and industry, sales of E2W fell by about a fifth month-on-month in April due to price hikes by some OEMs and a shortage of working capital in the absence of subsidy disbursal by the government. Overall, while FAME II is in its penultimate year, only about half the target of 15.62 lakh EV sales has been achieved so far. Of the targeted electric vehicles, an overwhelming 10 lakh were to be E2W and the outlay for FAME II was Rs 10,000 crore.

While drafting FAME II, policymakers should have assessed the depth and breadth of local supply chains before earmarking localisation levels. It was obvious that in the absence of local manufacturing of some critical components, vehicle makers would have no option but to import from China, a global supplier in the EV space. In any case, after the policy was launched, the government’s testing procedure should have been more robust to detect any subsidy misappropriation.

Now, as India’s EV sales lag target, there is an urgent need to relook at the need, quantum and quality of subsidies  ̶ should they be offered, should they stimulate demand or could they be focused on the supply side only? Subsidies eventually distort the market but is the Indian industry at a stage where it can survive without such a mechanism? As the government is equivocal about extending FAME II amid a push by different parliamentary committees for an extension of the scheme, perhaps the entire architecture of incentivisation needs a relook.

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.