FAME and fortune

Controversy highlights hazards of subsidy-led manufacturing

The controversy that has erupted in the electric vehicle (EV) industry, especially electric two-wheeler (E2W) makers, over alleged irregularities by manufacturers in accessing the second edition of the Faster Adoption of Manufacturing of (Hybrid and) Electrical Vehicles, or FAME II, highlights the problems associated with subsidy-promoted manufacturing. The rationale for two editions of the FAME subsidies was unexceptionable: To promote climate-change goals and reduce emission from vehicles with internal combustion engines (ICE). Both versions of FAME unquestionably put EVs on the Indian road map, with sales growing from 2,627 units in FY14 to about 1.18 million in FY23, the bulk of those being E2Ws.

But two issues have resulted from this. First, rather than being driven by natural market demand, sales, especially of E2Ws, have been driven by the subsidy, which under FAME II could go up to 40 per cent of the cost of the vehicle. Second, subsidies rarely come without conditions attached. Manufacturers can struggle to meet those terms and, inevitably, some degree of transgression gets embedded in the system to ensure eligibility. The infamous “gold plating” of investment by fertiliser manufacturers to maximise subsidies in the last century is a case in point. Over the past year, some EV manufacturers find themselves subject to government scrutiny following whistleblower allegations that subsidy terms were violated. At issue is Rs 1,100 crore of subsidies due to 12 E2W makers for either violating localisation norms or tweaking prices by selling the battery charger separately to meet pricing rules.

Localisation norms have been a particular point of contention. The phased manufacturing programme rules set a target of 50 per cent of components to be locally sourced. This was roughly the same route that the ICE vehicle market had followed — though without subsidies — when the automobile industry was liberalised in the early nineties with then state-owned Maruti emerging as the epicentre of a vibrant domestic component industry. This has not happened in EVs because the exponential jump in overall sales obscures the fact that the volumes in each segment have not been high enough to justify investment by component makers. This has created a vicious circle of underinvestment and low levels of localisation, leaving EV manufacturers dependent on Chinese imports, a predicament, they claim, was accentuated by the hiatus of the Covid-19 year of 2020-21, when sales shrank.

The withholding of subsidies has resulted in a sharp fall in E2W sales from 82,292 units in March to 62,581 units in April; most of the fall has been led by some of the companies under government scrutiny, pointing to a potential threat once FAME II ends next year. India is not an outlier in this respect. The global EV market from China to the European Union has fallen sharply as subsidies and tax credits have been withdrawn. By some estimates, e-scooter prices in India could rise steeply from the current Rs 1.5 lakh to Rs 2 lakh-plus without the subsidy, a development that may well force the localisation issue. In the long run, a more sustainable policy would be to incentivise consumers to buy through low-interest loans or tax breaks. This would be easier to monitor than underwriting manufacturing with all its attendant irregularities.