FAME II scheme helps put EV transportation on a par with ICE vehicles

The incentive scheme helps put green transportation on a par with ICE vehicles

The subsidies extended under the second edition of the Faster Adoption and Manufacturing of Electric vehicles (FAME II) scheme can be described as fiscal steroids on wheels for an undernourished electric vehicle (EV) industry.
 

As EV consumers Zypp Electric Co-founder Akash Gupta and software veteran S Shankar share a passion for a cleaner environment. Gupta plans to add thousands of electric two-wheelers (E2Ws) to manage deliveries for clients; Shankar and his son plan to change their Internal Combustion Engine (ICE) car and two-wheelers (2Ws) to all-electric.
 

Underpinning Gupta and Shankar’s purchase decisions are Prime Minister Narendra Modi’s Rs 10,000-crore largesse, which translates into a huge Rs 3.5 crore in monthly savings for Zypp, given that the start-up deploys 1,000 bikes a month. For Shankar, it translates into a whopping 43 per cent saving on an Ola S1 or a Rs 68,000 discount on an Ather 450 Plus after including state subsidies in Delhi and Maharashtra. The net sticker price on these high-performance models is on a par with a Honda Activa.
 

“The FAME II policy has been highly successful in generating traction for EVs, since its launch in March 2019. Moreover, the ease with which the subsidy is availed of directly at the dealership while purchasing the vehicle has made customers’ life much easier,” said Barnik Maitra, managing partner, Arthur D Little India.
 

“The recently enhanced subsidy has led to e-two-wheelers reaching almost 5 per cent of total domestic sales for the past few months,” said Hemal Thakkar, director – transport, logistics & mobility, at ratings agency Crisil. “So the continuation of FAME II would be critical for the industry for economies of scale to kick in.”
 

FAME II has played a vital role especially on the two-wheeler side, not just in increasing consumer demand but also encouraging new OEMs to enter the space,” said Shruti Saboo, associate director, India Ratings and Research. In June 2021, the demand incentive for 2Ws was increased to Rs 15,000 per kilowatt hour (Kwh) from Rs 10,000 per kwh — capped at 40 per cent of the vehicle cost. This has helped original equipment manufacturers (OEMs) significantly reduce prices by 20-30 per cent thus making the upfront cost of E2Ws more comparable to an ICE vehicle. That sent sales volumes up by over fourfold on the year last fiscal, Saboo added.

The industry must run like a cheetah to achieve the government’s steep targets for EV adoption by 2030 — 80 per cent for 2Ws and 3Ws and 30 per cent for 4Ws from less than 2 per cent now. And the fuel for the run is provided by FAME.
 

The scheme’s reach is not limited to direct cash handouts alone. The conditions tagged to FAME II, which was extended by two years to 2024 after low disbursements, has helped spur indigenisation and enhance safety standards.
 

“FAME-2 incentivises product development and customer adoption,” said Arun Vinayak, co-founder of battery start-up Exponent Energy. “Any new technology is expensive and it needs incentives to get started.”
 

For instance, a single plastic mould can cost lakhs, and take a lot of capex, Gupta said. FAME enables taking risks upfront, Vinayak added. That is essential for Aatmanirbhar Bharat if India has to take on China, Taiwan and South Korea — these Asian giants have strong new product development capabilities, taking one-fourth the time of what it takes for India.
 

That said, FAME’s takeouts have been slow. The scheme was launched in April 2015 for two years but extended till 2019. Of the Rs 895 crore allotted, only 60 per cent was utilised despite a low qualifying standard. FAME II began April 2019 with a much higher bar — Covid and tough rules such as 40-50 per cent localisation, upgraded safety standards, and range requirements shut out several mom-and-pop EV shops that primarily import parts from China with little regard for quality and assemble them locally. With just over 10 per cent disbursed, only 60 companies are eligible for the subsidy.
 

“I could have trebled my sales if I had FAME II,” said Kunal Gupta, co-founder, EMotorad, a manufacturer of premium electric bikes which don’t qualify for a subsidy because of a low speed. Such bikes enjoyed a 30 per cent rebate in the EU in the past.

In the past two or three years, a financial crunch slowed domestic production of components while imported components of various grades did not pass the regulators, said Ankit Mittal, Co-founder of Sheru, a software solutions provider to the EV industry. A dearth of supplies, especially of semiconductors, led to imports of non-auto grade components, he added, which makes them ineligible for a handout. The government is channeling the grants to develop a robust EV bus fleet. New Delhi has allocated over 6,000 buses under FAME II.
 

Also, the subsidy is now pegged to the size of the battery, the most expensive component of an EV, to provide price parity with ICE vehicles, said commercial EV maker Altigreen’s Founder Amitabh Saran. FAME was fashioned to compensate for high lithium cell costs, which at one point were $600-$700 per Kwh and were expected to drop to less than $100 per kwh. That’s not been the case, Saran added. Altigreen, in which Reliance is an investor, develops cargo bearing E3Ws with plans to build 7,000-10,000 vehicles this fiscal. Cell rates are still around $250 per Kwh. The subsidy on 3Ws is only Rs 10,000 per Kwh, a third lower than for E2Ws.
 

A lower subsidy rate on E4Ws is evident in slow adoption. The subsidy on a Tata Nexon is only around 10 per cent of vehicle price — in case of passenger vehicles the upfront pricing of an e-PV is as high as 1.6x to 2.0x of an ICE PV, Saboo said. Thus, to ensure a mass penetration in this segment, subsidies would remain crucial.
 

Subsidies have played a key role in EV sales in China and Europe. In China, the subsidy programme was rolled out in 2009, and has been extended three times till 2023. France and Germany announced incremental subsidies to boost EV penetration. China’s new energy vehicles’ (NEV) production in January-August more than doubled from a year earlier, with sales rising by 110 per cent to 3.86 million units. That compares to India’s total passenger vehicle sales of just 2.8 million last fiscal.
 

China plans to boost sales of NEVs five-fold to 25 per cent of the total new car sales by 2025, with NEV sales this year to rise to 6 million units. India’s E4Ws sales are measly.
 

Low penetration underscores India’s need to continue FAME beyond 2024 for at least another three years, industry officials said. And that calls for an extension, at least until our EV vehicle sales are at 25 per cent of all new vehicle sales, Zypp’s Gupta said.
 

But direct cash incentives to create a market have their limitations. Arthur D Little’s Principal Fabian Sempf said for the future the government needs to look at structural changes that can help grow the overall EV ecosystem, rather than direct cash incentives alone. “One of the root causes of customer anxiety related to EVs is availability of charging infrastructure,” Sempf added. Incentivising infrastructure operators for fast-charging equipment costs and set-up would go a long way just as it did in the US, where the government has incentivised utilities to set up charging outlets. If there is a FAME III, this is where it should focus.