FAME subsidy needs to continue: Ather, other OEMs

The FAME-II subsidy has played a crucial role in supporting the transition from ICE vehicles to EVs and the incentives are needed for two-three years more, until the penetration reaches an inflection point. This was pointed out by executives from new-age EV startups at the India EV Conclave organised by our sister publication, Autocar Professional with the government of Tamil Nadu. 

The introduction of the Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles (FAME) scheme and additional benefits in the form of lower Goods and Service Tax (GST), and other taxe incentives in some jurisdictions, are driving electric two-wheeler adoption in the country on a large scale.

1. FAME-I and -II schemes helped quicker adoption of EVs
2. Nearly 10 lakh EVs have been sold under FAME II scheme
3. EV makers predict 70 percent of total sales will be electric by 2030 

The government rolled out the first phase of the FAME scheme in 2015, followed by the second phase in 2019. FAME I came with a budgetary outlay of Rs 895 crore, while FAME II was rolled out with a much bigger outlay of Rs 10,000 crore, for a period of three years ending 2022. The scheme was, however, extended to March 2024 following the COVID-19 outbreak.

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Affordability has been a major factor in the sales of electric two-wheelers in the country as battery costs and supply constraints of components have kept electric vehicles at a premium. However, incentives under the FAME scheme aided the shift to electric mobility in the last couple of years.

“There is a role that incentive has to play, but only up to a time. The ecosystem of the complexity of the auto industry will need at least 15-20 percent penetration, until which we will need demand incentives. The following 10-15 percent penetration can be driven by supply incentives,” said Sanjay Behl, the Chief Executive of Greaves Electric Mobility.

Currently, the FAME subsidy on registered electric two-wheelers amounts to Rs 10,000 per kWh, with a cap of 15 percent of the ex-factory price of vehicles. The scheme aims to support one million electric two-wheelers.

The subsidy is given to electric two-wheeler consumers in the form of an upfront reduced purchase price and the government reimburses the manufacturers for the discount. The Ministry of Heavy Industries’ website shows that 9,97,653 electric two-wheelers have been sold under the FAME-II scheme.

Two-wheelers have emerged as the frontrunner in the electrification of India’s automobile sector. Around 6,22,000 electric two-wheelers were sold in the Indian market during the calendar year 2022. Currently, the penetration of electric vehicles is at around 5 percent in the two-wheeler segment.

Sanjay Behl believes that once the penetration level approaches one in every four two-wheelers being electric, or 25 percent, the scale can go up exponentially. “I see the role of incentives for the next 24-36 months in this industry,” Behl said.

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Automakers are aware that the subsidy is not going to stay forever. With a sharp focus on cutting vehicle costs and enough scale, the companies see sustainable growth, post-subsidy regime. Higher volumes can aid companies in reducing material costs through vendor negotiations.

Ather Energy’s Chief Business Officer, Ravneet Phokela, is also of the opinion that the subsidy has a role to play in the next 36 months, during which, the cost efficiency is expected to build with scale.

“Three or four things are happening in parallel. There is value engineering happening on the cost side, along with localisation and scale things that will kick in. Then there is a reduction in cell prices globally as and when local production starts. We believe in about a 36 month period, the equation sort of pans out,” Phokela said. Automakers believe there is significant headroom to reduce the cost of electric two-wheelers on account of localisation and innovation.

“Today, the prices are where they are because of the costs. Our costs have come down in the last few years and they are continuing to come down. There is enough headroom to improve in terms of cost. Like I said, whether its localisation, scale, PLI, cell prices, value engineering, there is enough,” Phokela said.

India will start production of advanced chemistry cell batteries from January under the government’s production-linked incentive scheme, which has an outlay of Rs 18,100 crore. Domestic production is expected to reduce the cost pressure for automakers to an extent. 

Meanwhile, Phokela noted that predictability is crucial for sustainable growth in the industry. “What is really critical for the industry is predictability. My capacity plans, offerings in a segment and discussions with suppliers entirely depend on my understanding of subsidy,” he said.

In June, the government slashed the subsidy for electric two-wheelers under the scheme to Rs 10,000 per kWh from Rs 15,000 per kWh. It also reduced the cap on incentives for two-wheelers to 15 percent of the ex-factory price of vehicles from 40 percent.

Monthly retail sales of electric two-wheelers peaked at around 1,05,000 units in May. However, the sales growth hit a speed bump after the revision in subsidies as manufacturers increased prices by 10-25 percent. Sales crashed to 45,700 units in June following the reduction in subsidy.

Also, the government has not given any update on what happens to the FAME-II subsidy when it expires in March. Though the government officials have hinted that the third leg is being planned at a much more ambitious level, there has been no official announcement yet.

Vinay Harne, advisor for technology at TVS Motor also noted the requirement of predictability and consistency. “Subsidy should continue for a predictable amount of time. It cannot be up and down. So if there is a certain consistency and subsidy is there for a certain longer period, then all the research and development will be in the right direction,” he said. 

Post the subsidy reduction in June and FAME-II fiasco, the electric two-wheeler market consolidated in favour of large traditional players. The top five two-wheeler makers now account for about 75 percent of the electric two-wheeler market. In the past year, their share was below 50 percent.

The new-age automakers had the early mover advantage to gain the market on the back of incentives. Players like Hero Electric, Okinawa Autotech and Ampere Vehicles were among the top five electric two-wheeler makers. However, the withholding of subsidies for some of the companies –due to violation of local sourcing norms – and reduction in subsidies dented the market share of some new-age companies.

However, electric two-wheeler sales have now recovered from the dip in June. Retail sales during the Jan-Oct period came in at 6,31,174 units, surpassing the calendar year 2022 sales. For the full year, total sales is projected to grow between 18-25 percent on a year-on-year basis to the range of 7,50,000 to 8,00,000 units. Festivals and wedding season demand will boost purchases before the year is out.

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Currently, the Rs 1 lakh plus price range is the sweet spot for electric two-wheelers, and for a higher adoption, there is a need for more affordable options.

“95 percent of the market is not into the electric vehicle space. The people who attempt to discover electric are in the frame. There are a lot of people sitting on the other side, and to unlock them you need multiple offers like price point-wise, motivation-wise and that is what fuels the market,” Harne added.

By 2030, the two-wheeler companies are forecasting electric vehicle penetration in the segment to be over 70 percent. 

With inputs from Kiran Murali.