Will slash in EV subsidies be a key inflection point for the market?

Reduction in subsidy of electric two-wheelers has led to significant uncertainty in the domestic market, with big brands such as Ather, Matter and Ola Electric pushing up prices across the range. A slash in subsidy percentage under the FAME-II scheme has invited mixed reactions from across the country, with some believing that it may derail efforts for faster adoption of EVs in India. 

However, auto finance companies believe that a reduction in subsidy was inevitable and it is now time for Original Equipment Manufacturers (OEMs) to revise their financing models and make the EV 2-wheeler segment more lucrative. IBT spoke with fintech companies in India to know the current market sentiments and a vision of funding electric vehicle start-ups. 

Electric scooter_TPCI

Image credit: Hero Electric

New Delhi, June 7: With the price hike of electric vehicles, all eyes are fixed on the sales and demand of EVs in India. As of June 1, EV manufacturing companies in the country such as Ather, Matter and OLA EV have announced hikes in the prices of two-wheelers across their product ranges.

Post the announcement by the central government on the reduction of the FAME II subsidy, vehicle showrooms have registered a surge in pre-booking of EV two-wheelers. But as of June, EV vehicles, under the capacity of 15,000 kWh, will become more expensive. Some companies have either fully or partially passed on the subsidy losses to their customers.

What is the FAME-II subsidy scheme?

The FAME 2 subsidy, or Faster Adoption and Manufacturing of Hybrid and EV scheme (FAME-II), has been in effect since April 2019. For any electric two-wheeler to qualify for the scheme, certain criteria have to be met, including mileage of 80 km on a single charge and should manage to go at least a minimum of 40 km/h. Also, the two-wheelers need to have a certain degree of localised manufacturing for them to qualify for the benefits.

If a product passes all the necessary criteria, as mentioned in the scheme, the government offers a subsidy of Rs 15,000 per kWh of battery. There is also a subsidy cap put into place, where the subsidy is only eligible for 40% of the vehicle’s total cost.

Now, while this subsidy is directly passed on to the customer, EV manufacturers already account for this subsidy when quoting the price at the time of purchase. Apart from subsidies offered by the central government, several state governments have implemented their own subsidies for EVs. These may vary according to the state with some offering fixed subsidies whereas others take into account factors such as battery capacity, performance and other such aspects before fixing on a price.

The scheme got a budgetary support of Rs. 10,000 crores. Through this scheme, the government aims to provide incentives to various categories of vehicles such as:

  1. Electric Two-wheelers: 10 lakh registered electric two-wheelers will get an incentive of Rs. 20,000 each.
  2. Electric Four-wheelers: 35,000 electric 4-wheelers with an ex-factory price of Rs. 15 lakh will get an incentive of Rs. 1.5 lakh each.
  3. Hybrid Four-wheelers: Through this scheme, the Government will provide Rs. 13,000 – Rs. 20,000 as an incentive to hybrid 4-wheelers with an ex-factory price of Rs. 15 lakh.
  4. e-rickshaws: 5 lakh e-rickshaws (each) can avail Rs. 50,000 as incentives.
  5. e-buses: Nearly 8000 e-buses with a maximum ex-factory price of Rs. 2 crores will receive an incentive of Rs. 50 lakh each. Under the second phase of the Fame India Scheme, the government is hopeful of establishing 2700 charging stations in metros, smart cities, hilly states, and million-plus cities across the country. The central government also aims to cover highways as well and establish charging stations on both sides of the road with a gap of 25 km between two consecutive stations.

On May 19, the Ministry of Heavy Industries restructured the FAME scheme. The new structure which came into effect from June 1st onwards, brings down the subsidy per electric two-wheeler from 40% to 15% of the ex-factory price or from Rs 15,000/kWh to Rs 10,000/kWh.

Earlier, some electric two-wheelers were getting a subsidy of up to Rs 60,000, however, now the companies will have to either absorb or pass on the subsidy loss. This comes on the back of the withdrawal of Rs 1,100 crore worth of subsidies by the Ministry of Heavy Industry, due to allegations that manufacturers were not meeting the mandated localisation norms.

Leveraging an Opportunity Amid Crisis?

EV brands such as Ather Energy ran several ad campaigns encouraging their customers to buy or book vehicles at old prices before 1 June, while companies like Ola Electric allowed customers to book vehicles at old prices till 30 May.

In spite of record EV two-wheeler sales registered in May, the industry overall is likely to witness a dip in the sales figure for the month of June. However, fintech companies believe that the downward sales trend will be short-lived and consumers’ sentiments towards EVs will soften.

A reduction in the subsidy amount is likely to widen the price gap between EV and ICE engine automobiles, though experts are now hoping that the EV industry may launch lower-specification versions of electric two-wheelers to counter the price increase.

Speaking with IBT, Sameer Aggarwal, Founder and CEO, Revfin, said that EV OEMs will rethink long-term finance models for 2-wheelers, to the extent of looking into creating longer-durable vehicles. He also said that companies may now explore the possibility of alternative methods to reduce prices such as battery-swapping technologies.

“We need to assess the demand of a consumer. Do they need a bike which covers 120 km per day or are they okay with a lower mileage EV bike? It is about giving options and variations to users,” Aggarwal added.

He has stated that post the reduction in subsidy under the FAME-II scheme, his company has requested all its associated manufacturers to submit a list of documents to do longer-duration loans.

“Whether it is extended warranty, AMC packages, setting up more off-service network; all of those things are working at the moment. Ultimately it is all about discussing with the manufacturers to make the vehicles more affordable for longer duration loans or reduction in batter capacity,” he added.

Pankaj Gupta, CEO, Mufin Green Finance, says that subsidies, such as the FAME-II scheme offered by the government, can only be beneficial on a short-term basis and are not a sustainable solution.

“After the government’s decision to reduce FAME II subsidies from a staggering 40% to 15%, it was inevitable to see the knee-jerk reaction from the industry, especially E2W players. But I believe the driving factor for EVs is the economics. Therefore, cost of running & maintenance, which is almost 70-80%, should be the key focus,” he said

Pankaj views the reduction in subsidy as a move that may highlight the need for sustainable cost reductions in manufacturing. He believes that OEMs will relook at consumer pricing and research the EV market from a much closer lens. This will make most of the bigger players contemplate expanding their product portfolios.

He said, “While I foresee there might be a temporary drop in E2W adoption rate in initial phases, it will pick up pace in the long haul and changes like modification of battery compositions and new EVs opting to offer fewer features are highly likely.”

Industry experts are expecting potential revisions of the FAME subsidy to include support for electric cars. It is also expected to continue supporting the development of public charging infrastructure, ensuring increased accessibility and convenience for electric vehicle users.

The emerging trend in EV financing wherein dedicated EV loan products include attractive interest rates and longer repayment periods may hold some promising future for customers. The new battery and safety norms are expected to positively impact EV consumers by ensuring improved battery performance, safety standards, and longer-lasting vehicles, leading to increased consumer confidence in adopting electric vehicles.

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