Indian Government's EV Subsidy Reduction: Balancing Act or Setback?

The reduction in the subsidy percentage raises concerns about the affordability and viability of EVs in comparison to petrol-powered alternatives. What are the implications of this subsidy cut?

Sonu Vivek
24 May 2023
Indian Government's EV Subsidy Reduction: Balancing Act or Setback?

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The Indian government has shown remarkable enthusiasm for promoting electric vehicles (EVs) across the country. With the introduction of the FAME-II policy, the government aimed to incentivize the adoption of EVs by providing substantial subsidies. However, recent developments have seen a significant reduction in the subsidy percentage from 40% to 15% per vehicle. This move was intended to benefit a larger section of society, but it raises concerns about the affordability and viability of EVs in comparison to petrol-powered alternatives. 

What are the implications of this subsidy cut? Whether it aligns with the government's objective of encouraging the transition to EV vehicles? 

Examining the Government's Approach: Balancing Adoption and Inclusivity

While the government's decision to reduce the individual subsidy may seem contradictory to its promotion of EVs, it can be viewed as an attempt to strike a balance between fostering adoption and ensuring inclusivity. By allocating subsidies to a larger number of people, the government aims to extend the benefits of EVs beyond a select few. This approach reflects a broader perspective of benefiting society as a whole rather than catering only to a specific segment.

Jayapradeep Vasudevan, Chief Business Officer at Raptee Motors spoke to TICE and mentioned that the deduction in EV subsidy has been done with the aim to cover a larger population. He also mentioned that the reduction in EV subsidy will affect the market of EV vehicles for a brief time as the buyers may find it difficult to understand why the prices have suddenly gone up. 

“By reducing that 40% to 15%, they can cover a larger volume as the overall pool of amount allocated by the government or subsidy remains intact. However, by reducing the per-bike or per-vehicle subsidy, they can cover more population. It is a drop in the subsidy offered, but at least it's going to cover a larger population and therefore to that extent it will help the industry, is what I would say. For an individual buyer, it is very difficult to accept all these things and therefore it is bound to have some impact for some time. So it will take some time for the market and the consumers to actually understand and realize this. The market will take time to absorb this shock and it will be difficult for even the dealership sales team to explain this to the potential buyers,” explained Jayapradeep Vasudevan. 

The Impact of Subsidy Reduction on Electric Vehicle Affordability

One of the primary concerns arising from the subsidy reduction is the impact on the overall cost of EVs. Electric vehicles are generally priced higher than their petrol-powered counterparts due to various factors, including battery technology and production costs. To add to it, there are still limited charging stations for EVs in India at the moment. The reduction in subsidies further widens the price gap, making EVs comparatively more expensive.

Affordability plays a crucial role in driving the mass adoption of any technology, including EVs. While the government's move aims to benefit a larger section of society, it inadvertently places a burden on individual consumers who are now required to bear a higher upfront cost for EVs. This may discourage potential buyers, especially those who are price-sensitive or have limited financial resources.

The subsidy cut can have repercussions on the overall growth of the EV market in India. The affordability factor becomes a significant barrier, particularly in a price-sensitive market like India. Without substantial incentives, the transition from petrol-powered vehicles to EVs might slow down, hampering the government's broader objective of reducing carbon emissions and promoting sustainable transportation.

Overcoming Affordability Challenges: Implications for Consumer Adoption

To mitigate the adverse effects of subsidy reduction, it is crucial for the government to explore alternative strategies. Long-term incentives, such as tax benefits or reduced registration fees for EVs, can help offset the cost disparity. Additionally, fostering collaborations with financial institutions to provide attractive financing options or introducing leasing programs can make EVs more accessible to a wider audience.

The Importance of Awareness and Infrastructure

Beyond subsidies, creating awareness about the long-term benefits of EVs and establishing a robust charging infrastructure are essential for their successful adoption. Investing in the development of charging stations and promoting public-private partnerships can alleviate range anxiety concerns and encourage consumers to consider EVs as a viable alternative to petrol-powered vehicles.

What are the changes in the FAME-II  scheme? 

The government has recently made revisions to the subsidy provided under the FAME-II (Faster Adoption and Manufacturing of Electric Vehicles in India) scheme, specifically for electric two-wheelers registered on or after June 1, 2023. The Heavy Industries Ministry has officially notified these changes. As per the updated guidelines, the demand incentive for electric two-wheelers will now be Rs 10,000 per kilowatt-hour (kWh). Additionally, the cap on incentives for electric two-wheelers will be reduced from the current 40 percent of the ex-factory price to 15 percent.

What is the FAME-II  scheme? 

The FAME India scheme, aimed at promoting the adoption and manufacturing of electric and hybrid vehicles, was initially launched on April 1, 2019, for a period of three years. However, it has since been extended for an additional two years, up to March 31, 2024. The total budget allocated for Phase II of the FAME scheme is Rs 10,000 crore, which aims to provide incentives to buyers (end users or consumers) of electric vehicles, encouraging wider adoption. The incentives can be utilized to reduce the purchase price and are exclusively applicable to public and commercial transport in the electric three-wheelers (e-3W), electric four-wheelers (e-4W), and electric buses segments.

It's important to note that the incentive benefits are specifically available for privately-owned registered electric two-wheelers (e-2W).

The Indian government's decision to reduce subsidies on EVs, while aiming to benefit a larger section of society, poses challenges to the affordability and viability of these vehicles. Striking a balance between affordability and inclusivity is crucial to ensure the widespread adoption of EVs. By exploring alternative strategies, creating awareness, and investing in charging infrastructure, the government can mitigate the impact of subsidy reductions and continue its mission of promoting sustainable and eco-friendly transportation in India.