Fixing FAME-II

Incentives under EV scheme need to be reworked

The government’s FAME-II (Faster Adoption and Manufacturing of Hybrid & Electric Vehicles in India) programme has received some criticism about its parameters. Most recently, the managing director of Bajaj Auto, Rajiv Bajaj, has accused it of “putting the cart before the horse” — of seeking to accelerate manufacturing in India without ensuring there is adequate demand for the electric and hybrid vehicles so produced. FAME-II, which was passed by the Union Cabinet in February, will cost Rs 10,000 crore over three years and intends to provide incentives to the manufacturers of electric and hybrid vehicles. Mr Bajaj believes instead that mandates are required: Automakers should be directed to produce a certain percentage of electric vehicles per year. Here Mr Bajaj may be wrong. Incentives are the best path towards a faster adoption of electric and hybrid vehicles. The history of India Inc is replete with examples of how it has gotten around one government mandate or another. It should not happen again.

This is not to say that FAME-II should not be tweaked to improve its effectiveness. It is certainly true, for example, that it creates a relative disincentive for smaller vehicles since the amount of incentive is tied to the size of the battery in the vehicle. Electric two-wheelers and three-wheelers are most appropriate for Indian conditions. In fact, small electric scooters have the capability of revolutionising urban transport in India. Ride-sharing on electric scooters has penetrated many cities in the West and is recognised as being of considerable convenience. The government should ensure that FAME-II is structured in such a way that the adoption of electric two-wheelers and three-wheelers is not hampered but instead sped up.

Mr Bajaj is right, however, to draw attention to the fundamental mismatch in the government’s strategy. FAME-II should have been structured towards the creation of demand, not the localisation of production. Currently, for vehicles to benefit from the scheme, 50 per cent must have been produced locally. This is not the right approach. The government should have learned from the battle over solar panels: It is better to ensure adoption first, and then a local industry can be created. This is doubly true in the case of electric and hybrid vehicles since India has considerable expertise when it comes to automobiles, two- and three-wheelers, bicycles and auto components. The focus must be on ensuring it is easy and cheap for consumers to switch to using electric vehicles.

Another focus should be on retrofitting existing small vehicles at a nominal cost. The CNG fleet of auto-rickshaws in Delhi, for example, can at a relatively small cost to owners be transformed into an all-electric or hybrid fleet. This would require some innovative finance, which the government could backstop. CRISIL has pointed out that 95 per cent of the electric two-wheeler models currently produced in India will not be given incentives under FAME-II. This is clearly a bad idea — lobbying by automobile manufacturers should not have been allowed to succeed. The government must tweak FAME-II keeping these issues in mind.