Entire E2W supply chain under stress as govt stance on subsidy hardens

Uncertainty over direction of govt policies is slowing investments and purchases; vehicle and ancillary makers need 5-year policy perspective to take investment calls, say industry experts

The government’s latest move to further tilt the electric vehicle (EV) subsidy apple cart from  June 1--midway through the FAME-II EV subsidy scheme--slashing the subsidy by 50 per cent will hurt the interests of both producers and investors and confuse the end-consumer, industry officials said.

Vijayan Sundaresan, an entrepreneur, is one such confused customer. A distributor of snacks who has to navigate the narrow streets of Chennai every day to stock the shelves of mom-and-pop shops with corn puffs, Vijayan plans to replace his ageing Splendour with a 2WEV. Last month, his neighbour secured a Rs 40,000 discount on a new EV, based on which Vijayan had budgeted his purchase. "I need to pay more for the vehicle now, and that’s not fair," said Vijayan. He was told last month by EV dealers that benefits under the Rs 10,000 crore FAME-II scheme will be available until next March. Now he has to cough up Rs 60,000 more. "I may continue with my Splendor," he said. "Maybe the government will change its mind again."

Growing uncertainty over the direction of government policies is slowing investments and purchases, said the CEO of a leading EV logistics company, which supplies units to e-commerce operators and cab companies. Vehicle makers and ancillary manufacturers need a five-year policy perspective to take investment decisions, said a top official from a leading 2WEV manufacturer.

"The upfront price differential of an E2W vis-a-vis ICE vehicle is expected to increase materially, given the reduced subsidy benefit, and the payback period for a premium E2W would increase to five years (from three years) post the latest revision in FAME-II benefits," said Rohan Gupta, vice president & sector head, at ratings agency Icra.

Measures to trim subsidies have coincided with a government investigation into subsidy misuse, and directives to enhance battery standards--to avoid a slew of fire accidents that plagued the 2WEV industry last summer. That has squeezed working capital for smaller EV makers and sent production costs higher, an industry official said. Lower subsidies will  lead to higher vehicle costs, Icra said.

Sales of registered 2WEVs may clock half of a 2.3 million vehicle target this fiscal, at around 1.2 million, if the subsidy issues linger, said Sohinder Gill, CEO, Hero Electric, which until last year was the industry leader, but was forced to slash output after the government withheld subsidies to the company under an ongoing investigation into alleged irregularities by manufacturers registered under the FAME-II subsidy scheme. Sales of EVs in fiscal 2022-23 was around 800,000, short of a 1.2 million target.  

A climate of lower subsidies and higher production costs threaten to upend India’s EV ambitions, and reach net zero by 2070. At 1.1 per cent, EV penetration is well below the Asian average of 17 per cent, according to S&P Global Ratings. Delayed adoption by customers also threatens the government’s goal to have 75 per cent 2WEV penetration rate by 2030.

India plans to reduce subsidies to consumers on purchase of EVs from June. The new scheme slashes the incentive paid on a EV battery by 50 per cent to Rs 10,000 per kilowatt hour (Kwh) and lowers the cap on the incentive to 15 per cent of the ex-showroom price from 40 per cent earlier.

Subsidy cuts come on top of the Rs 1,200-2,000 crore of incentives withheld from manufacturers including erstwhile industry leaders like Hero Electric and Okinawa on charges of using importing components and violating the rules of  FAME-II. The use of domestic components of up to 50 per cent was only a guidance and not a contractual condition because of unavailability of components locally of the necessary quality and quantity, said the CEO of a leading EV manufacturer, which is also under investigation.

There may be some impact on sales in the short term, said Arun Vinayak, co-founder of battery maker Exponent Energy. But eventually the industry will adjust to lower subsidies, he said. Rajiv Bajaj, Bajaj Auto MD, told this newspaper earlier this month that the subsidy amount could have been directed towards creating the right infrastructure for EVs.