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India should increase consumer subsidies for electric vehicles rather than reducing


Last month's visit to the United States by Prime Minister Narendra Modi highlighted how divergent the two countries' electric vehicle (EV) strategies are. While the United States has extended its EV support policies via the landmark Inflation Reduction Act (IRA), India has recently reduced subsidies for electric two-wheeler EVs (E2W) under its flagship demand incentive programme, Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II). This decision could prematurely curtail the expansion of India's electric vehicle industry. The government should instead increase subsidies to guarantee the successful decarbonization of its transport sector.


The United States' decision to extend tax credits of up to $7,500 for light-duty electric vehicles (EVs) through 2032, along with other measures under the Inflation Reduction Act (IRA), have ignited a growing international competition to accelerate EV deployment and capture a larger share of the battery supply chain. China, the global leader in EV adoption, has recently announced a $72 billion package of incentives and tax exemptions to promote EVs and other green vehicles. These support measures eclipse India's support for electric vehicles. To date, the scheme has helped subsidise 785,00 electric vehicles at a cost of Rs 3,800 Cr ($460 million). 695,00 E2Ws were sold last month, constituting 67% of all EV sales and contributing to the policy's overall success to date.


The decision to reduce support under FAME-II from INR 15,000 per kWh battery capacity to INR 10,000 per kWh for electric two-wheelers (E2Ws) registered on or after 1 June 2023 risks having a negative impact on the country's emerging EV ecosystem. Incentives for E2Ws will be limited at 15% of the vehicle's ex-factory price, down from 40% of the vehicle's ex-showroom price.


Under the FAME-II scheme, the government is investigating E2W original equipment manufacturers (OEMs) for allegedly violating localization norms, which require OEMs to ensure that at least 50 percent of the components in their electric vehicles are indigenously manufactured and sourced. While these are severe allegations that require resolution, it is anticipated that the price of E2Ws will increase by 15 to 18 percent, having a significant impact on their affordability for end users. Models with battery capacities of 3 kWh or higher are likely to experience the greatest impact.


In fact, the otherwise expanding market is exhibiting early signs of a demand decline. As a result of the FAME-II reduction, the adoption rate for E2Ws has decreased from 6% of all two-wheeler sales in the first five months of this year to around 2.9%, with daily sales averaging 1200 units in June 2023. Similarly, daily sales of petrol 2Ws increased by 4% to 46,755 units in June from 44,915 units in May. Therefore, the diminishing consumer E2W subsidies are concerning and inconsistent with India's policy objectives.


With two-wheelers dominating India's road transport sector and accounting for approximately 70% of registered vehicles, their electrification can play a significant role in attaining the country's environmental and industrial objectives. Schemes like FAME-II can help make EVs more affordable by reducing the initial capital and financing costs for consumers, fostering a consistent demand for a business-friendly environment, and promoting localization.


In contrast, the reduction in subsidies could delay the profitability of firms in India's electric vehicle (EV) manufacturing sector, hinder innovation, and have a negative impact on an emerging industry. To mitigate the impact of the subsidy reduction, original equipment manufacturers (OEMs) may transfer their focus to producing batteries with less capacity and shorter range, thereby aggravating range anxiety and stifling innovation.


EV support should be viewed as a long-term investment in order to jumpstart the industry and assure widespread consumer adoption. Once the market reaches a critical mass, subsidies will no longer be necessary, but adoption across categories in India is currently low. The United Kingdom, for instance, recently eliminated subsidies for electric vehicles after their market share reached 20%. India has not yet reached this benchmark. In fact, the Parliamentary Committee on Estimates evaluated India's EV policy earlier this year, concluding that the removal of government support would result in a considerable price increase for EVs and recommending a two-year extension of the FAME-II scheme.


In fact, India's support for EVs is the lowest among different energy technologies, with a recent analysis by the International Institute for Sustainable Development (IISD) showing that consumption subsidies for oil and gas in FY2022 alone were nearly seven times higher than the cumulative subsidies under the FAME scheme's two phases since 2015. The government could transfer targeted support from the oil and gas sector to the promotion of EV adoption, thereby creating fiscal savings, enhancing energy security, and bolstering India's manufacturing ambitions.


The Government of India's think tank NITI Aayog concluded that a successful rollout of FAME-II and other policy measures could result in an EV sales penetration of 30 percent for private automobiles, 70 percent for commercial vehicles, and 80 percent for two- and three-wheelers by 2030. To accomplish this, support programmes, policy stability, and comprehensive planning along the entire EV value chain will be essential.


The government must therefore increase its support for the entire EV value chain, including charging infrastructure, concessional financing, and the adoption of EVs in other segments, such as buses and heavy-duty vehicles. As a result of the recent policy shift, increasing subsidies should have no effect on extant support measures. India could learn from the United States and China by refocusing its electric vehicle (EV) strategy and policies to guarantee a widespread deployment of EVs that will result in a successful decarbonization of the country's transportation system.


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