Reduction in subsidy under FAME II has slowed pace of electric two-wheeler adoption: ICRA

In its latest forecast for the automotive industry, rating agency ICRA has on Tuesday released a forecast of a CAGR of nearly 6-9 per cent across the automotive segments over the medium to long term. ICRA said underlying factors such as rising per capita incomes, demographic profile, low vehicle penetration, favourable policy environment, including infrastructure development etc. are expected to help grow the industry demand at a steady pace. As far as electric vehicle penetration is concerned, government support in the form of subsidies (under the FAME-II policy), enhanced awareness, and increasing product launches, the segment has seen a material upturn in prospects over the past two years, it said. “While a reduction in subsidy benefits under the FAME II policy for e2ws from June 2023 has slowed down the pace of adoption to an extent, the OEMs remain focused on value engineering initiatives to develop more affordable products, and the same is likely to aid adoption over a medium term,” ICRA added. According to Shamsher Dewan, Senior Vice President & Group Head—Corporate Ratings, ICRA, given the healthy subsidies available in the electric two-wheeler (e2w) segment, it accounted for approximately 85-90% of the total EV sales (excluding the e-rickshaw segment) till date. “Even as hybrids are viewed as an intermediate step towards acceptance of EVs in the passenger vehicle segment, mitigating range anxiety and offering superior mileage, EV penetration is improving at a healthy pace, aided by enhanced customer acceptance,” he said.

Amid the ongoing electrification transition, the OEMs are expected to incur significant investments in the development of ground-up EV platforms and enhance manufacturing capacities. “The enhanced investment towards product development is expected to moderate the return indicators to an extent for the industry over the near to medium term. Competitive manufacturing capabilities and ongoing efforts by the OEMs to enhance the distribution network bode well for export prospects. Over the near term, the domestic industry volumes are expected to continue to drive growth, with export prospects remaining weak amid a shortage of dollar availability in some key markets and inflationary pressures,” ICRA said.

Over the near term, the domestic industry volumes are expected to continue to drive growth, with export prospects remaining weak amid a shortage of dollar availability in some key markets and inflationary pressures. “We expect growth across the automotive industry segments to remain at moderate levels in FY2024. While the passenger vehicle volumes would continue to trend upwards, aided by favourable demand drivers, the two-wheeler industry is also expected to record moderate growth in volumes aided by a low base. Even as the demand sentiments in the commercial vehicle industry remain steady, the volume growth is expected to remain low on a healthy base. The impact of an uneven monsoon precipitation on rural demand across segments remains monitorable, even as the Government’s efforts on rural infrastructure development, crop procurements etc. remain a positive,” Dewan said.

The domestic automotive industry has been on a comeback trail over the past two years, aided by a recovery in economic activities and increased mobility. The pace of revival across the various automotive segments has, however, been somewhat mixed. “Aided by preference for personal mobility and stable semiconductor supplies, the passenger vehicle industry reached all-time high volumes in FY2023, and the demand sentiments are expected to remain healthy in the segment (6-9% YoY growth in FY2024). The commercial vehicle industry saw a robust growth in volumes in FY2023 (on a curtailed base); even as the growth is expected to remain at modest levels in FY2024 (2-4% YoY) on a healthy base, the overall industry volumes are expected to approach pre-pandemic highs. In contrast to these two segments, the two-wheeler industry has continued to struggle with industry volumes still below the pre-Covid peak levels, with the material rise in cost of ownership constraining demand. Even as the industry is expected to record a moderate growth in volumes in FY2024 (4-7% YoY), a sustained recovery in demand sentiments remains to be seen, amid concerns regarding the impact of an uneven monsoon precipitation on rural demand,” according to ICRA.

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