Extend FAME II: Phase-out, rather than discontinuation of EV subsidy makes more economic sense 

The Committee on Estimates (2022-23) for evaluation of electric vehicle policy under the the Union Ministry of Heavy Industries suggested an extension of the FAME II scheme that was to end next year. 

India is massively dependent on oil imports and Internal Combustion Engine (ICE) vehicles produce air pollution and greenhouse gases, the committee wrote in its 26th report presented at the Lok Sabha March 24, 2023. 

“Promoting the use of EVs can have numerous benefits for the environment, public health, economy and technological innovation. India has been working to promote the use of electric vehicles (EV) through various schemes and incentives,” it added. 

It ideated the concept of India becoming a “major market for EVs in the future”. This reaffirms the government’s focus on demand-led growth.

Also, the committee, chaired by Girish Bhalchandra Bapat (deceased) include both plug-in EVs and hydrogen fuel cell-powered vehicles in their ambit of defining the term ‘electric vehicles’. This reflects the committee’s commitment to zero-emission vehicles (ZEV) future rather than simply pushing the envelope on short-term economic wins. 

Thus, their suggestion of extending the FAME scheme stands on a strong foundation of long-term vision of fiscal improvements in favour of the industry as well as the country’s commitment to promises made at the 26th Conference of Parties to the United Nations Framework Convention on Climate Change.

Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME India) Scheme was formulated by the Union Ministry of Heavy Industries in 2015 to promote adoption of electric / hybrid vehicles in the country. At present, Phase-II of the scheme (FAME II) is being implemented for a period of five years from April 1, 2019 with a total budgetary support of ₹10,000 crore.

In the recently presented Union Budget, Finance Minister Nirmala Sitharaman doubled the FAME II budget but didn’t extend the timeline.

Around 1.2 million EVs were registered in India in 2022-23 — 2.7 times of that registered in 2021-22, according to VAHAN, the road transport ministry’s vehicle database. Of them, 61.5 per cent (around 720,000) were electric two-wheelers. 

As a share of all the vehicle registrations, only 5.6 per cent were EVs in 2022-23.

EV adoption was low because of the higher upfront cost of EVs in comparison to ICE vehicles, the Committee found. This was because of the high cost of lithium-ion batteries, which was 30-40 per cent of the vehicle cost, their report showed.

The upfront cost of battery-operated vehicles is higher than the conventional vehicles, the members of the committee wrote in the report. However, the operational cost of battery-operated vehicles is lower than the conventional vehicles, they added. “Therefore, the overall lifetime cost of the battery-operated vehicles is lower than the conventional vehicles.”

The report noted:

The total number of EVs envisaged under FAME II can cumulatively save about 12 billion litres of fuel over their lifetime, which translates into monetary savings worth Rs 72,000 crore. It would lead to avoidance of about 27 million tonnes of CO2 emissions. 

“Removal of government support would result in price escalation of EVs significantly,” the experts flagged in the report. 

The committee found that a large number of startups are also involved in this field, and they may have to shut down once FAME II is withdrawn.

Many Indian startups are incorporated in the United States, with millions of dollars stuck in the US. Thus, the collapse of the Silicon Valley Bank (SVB) and Credit Suisse is especially worrying for the Indian startup ecosystem . 

However, it's the tech industry that is the biggest client of SVB — a large number of the bank accounts belong to Indian startups in the ‘software as a service’ sector.

The EV industry in India is mainly funded by Asian wealth managers like Nuvama (Ola), PETRONAS (Log9) and HeroMotoCorp (Ather Energy), besides the Indian government subsidies. Thus, the Indian EV industry has capital buffers to protect it against the recent American financial shock. 

However, as a simultaneous step, RBI has tightened liquidity in the Indian market. So, the intended micro, small and medium enterprises community being built to provide a foundation for the Indian EV manufacturing industry and increase EV demand in the country, will be hard-pressed for financial support. 

At this time, the GoI must show confidence in the Indian EV market and ‘plug in’ the capital sourcing gaps through an effective subsidy scheme like the soon-concluding FAME II.

At this point, it would be worthwhile to look at a leading electrified transport economy like China and draw lessons from their experience.

In 2009, the Chinese government, which boasts the largest EV market, began to provide generous subsidies for EV purchases. But the price differential and the number of buyers were both large. So, paying for the subsidies became extremely costly for the government.

As a result, China’s policymakers planned to phase out the subsidies at the end of 2020 and instead impose a mandate on car manufacturers. It became compulsory for car manufacturers to ensure a certain percentage of all vehicles sold by them each year is battery-powered. 

To avoid financial penalties, every year manufacturers must earn a stipulated number of points, which are awarded for each EV produced. The points are calculated on a complex formula that takes into account range, energy efficiency, performance and more. 

An academic paper published in February 2023 in the MIT Press Direct examined the battery EV market in China and concluded that a phase-out policy could be the most cost-effective while achieving higher sales promotion compared with alternative policies that provide larger subsidies over more prolonged periods. 

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