Will cut in FAME-II subsidies for electric two-wheelers derail India’s EV growth momentum?

The electric two-wheeler industry that sold 73,945 units in May and makes up almost 62 per cent of the overall electric vehicle (EV) industry, according to the Society of Manufacturers of Electric Vehicles (SMEV), is likely to be impacted by the subsidy cuts to the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME II) that come into effect today.  

The Ministry of Heavy Industries (MHI) had announced the subsidy cuts last month. The amendment comes in the background of the government’s decision to reallocate an additional Rs 1,500 crore under the FAME II scheme to the E2W segment.

The impact is already visible in EV prices. Ola Electric raised prices by Rs 15,000 for all scooters, while electric bike manufacturer Matter increased it by Rs 30,000. Ather Energy has also raised the prices of its e-scooters by Rs 25,000–30,000. Other companies are expected to follow suit.

According to Sohinder Gill, SMEV’s Director General, a gradual transition with sustained subsidies would have been ideal to ensure market growth and reach the international benchmark of 20 per cent EV adoption (presently just 4.9 per cent) before reducing the subsidies to customers. Industry players say the sudden cut may lead to a major decline in EV adoption.

According to ratings agency ICRA, the upfront price differential of E2Ws vis-à-vis ICE (Internal combustion engine) vehicles is expected to increase. The payback period for a premium E2W, which had declined to nearly 3 years after the amendment to FAME II guidelines in June 2021, would increase to nearly 5 years now. “In this scenario, manufacturers may decide to completely pass on the subsidy reduction amount to the consumers in the form of price hikes. Even as the total cost of ownership (TCO) for E2W remains favourable, aided by substantial savings on running costs, the lower subsidy benefits are likely to curtail the segment’s growth over the short term and would exert pressure on the cost structure of original equipment manufacturers (OEMs),” said Rohan Kanwar Gupta, Vice President & Sector Head - Corporate Ratings, ICRA.

EV makers say while the government aims to create more room for two-wheelers in the market, the subsidies cut poses a significant challenge for the nascent industry. “It could potentially dent the sales of electric two-wheelers, hindering their growth and adoption in the country. While the government aims to encourage market growth, this move risks impeding the adoption of electric mobility,” said Ayush Lohia, CEO of Lohia Auto, a prominent electric rickshaw maker. “In these crucial early stages, sustained support is crucial to drive consumer confidence and ensure the success of the electric two-wheeler segment. We urge the government to reconsider this decision and prioritise long-term sustainability over short-term gains,” he adds.

According to the industry, though the subsidy cut may lead to higher prices for electric two-wheelers in the short term, the eventual outcome will be a considerable reduction in cost for consumers. Globally, countries like China have successfully rolled back subsidies with minimal impact on EV adoption. According to the China Association of Automobile Manufacturers, during the seven years that China phased out its EV subsidies, while sales dipped in the first month after each rollback, absolute figures showed that sales in the seventh year of the rollback were substantially higher than those in the first year.