Demand drivers

Govt support for EVs needs a review

The government is reportedly considering the launch of the next phase of Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles, or FAME-III. According to reports, the scheme is also expected to cover light commercial vehicles, along with research and development in the renewables sector. In principle, faster adoption of electric vehicles (EVs) would not only help contain pollution but also reduce dependence on oil imports. However, the experience thus far suggests that designing incentive schemes to promote the adoption of EVs is not easy. The ongoing scheme, FAME-II, has run into problems. Meanwhile, the government has also started a production-linked incentive (PLI) scheme for the sector. It is thus intervening in both the demand and supply sides of the sector.

As reported by this newspaper recently, the Ministry of Heavy Industries would be listening to the electric two-wheeler manufacturers’ side in cases of the supposed violation of norms. It has also issued recovery notices to some of the manufacturers. In its investigation, the ministry found that manufacturers were using imported components and were violating the phased manufacturing programme guidelines under the scheme. It also came to light that some EV manufacturers were selling items, such as chargers, separately to keep the price of the vehicle low in order to qualify for the subsidy. As a result, the government reduced the amount of subsidy under the scheme in June, which affected sales significantly. The cap on subsidy was lowered to 15 per cent from 40 per cent of the ex-showroom price. In terms of battery capacity, the subsidy was cut from Rs. 15,000 to Rs. 10,000 per Kwh.

Thus, given the problems in implementation, it is not clear why the government would want to renew the scheme with a higher allocation. It is also worth noting that the scheme has not resulted in a significant adoption of four-wheelers or commercial vehicles. It is not clear if a fresh version of the scheme will have a noticeable impact in these areas. Also, the PLI scheme seems to be facing hurdles. One of the contentious issues is related to the rules of domestic value addition — some manufacturers are seeking relaxation. It is possible that at the time of disbursing incentives, there could be problems similar to those of FAME-II. It is thus important that if financial incentives have to be given to any industry, the schemes should be well-designed with clear sunset dates. In the case of EVs, the government first needs to have policy clarity as to how it wants to support the industry. Intervening on both the demand and supply sides not only has fiscal implications, but also demands more monitoring capacity.

If the government focuses on supporting demand, it is likely that businesses will respond with capacity creation. In this context, the government can concentrate on public transport, which is also important for containing emissions. However, the biggest hurdle in this area could be the finances of state transport corporations (STCs). It will thus be important for the Union government to work with states on the possibility of converting STC fleets into electric buses. As the scale increases and the associated infrastructure develops, private operators would also be encouraged to shift. In the case of private vehicles, the government can support the consumers, possibly with interest subsidies, and leave manufacturers to focus on production and innovation. As things stand, government support for EVs needs a comprehensive review.