Background

FAME has been a flagship scheme and one of the major drivers to boost the demand for EVs in India. It was introduced in 2015 as part of the National Electric Mobility Mission Plan (NEMMP) to promote manufacturing of electric and hybrid vehicle technology in India. Initially launched for the period of two years, it was extended till 2019 and supported 2.78 lakh EV sales with the total demand incentives of ₹343 crores. In addition, 465 EV buses were also subsidised under this scheme along with grants sanctioned for pilot projects, R&D development and promotion of public charging infrastructure bringing the total budget of the FAME scheme to ₹795 crores.

Upon the completion of the FAME scheme in 2019, the Ministry of Heavy Industries (MHI) introduced FAME-II with a budget allocation of almost 19x of FAME-I with an outlay of ₹10,000 crores over a period of 3 years. Additionally, in Q4 of FY 23-24, the budget was revised to ₹11,500 crores (adding 1,500 crores for the last quarter of the policy scheme), to continue the support for EV sales. Looking back, it is clear that FAME-I served to kickstart the EV ecosystem in India, supporting initial investments by generating necessary infrastructure and demand, while FAME-II was intended to aid in scaling the ecosystem in India (see table below).

While FAME-II acted as a natural progression to its predecessor FAME-I scheme, the current EMPS policy replacing FAME-II introduces uncertainty in the Indian EV policy landscape. One, the policy period is only for four months, coinciding with the completion of Lok Sabha elections 2024, ending in early June. In contrast, previous policies had an initial implementation period of at least 2-3 years and were extended up to 5 years. Two, the total budgetary allocation is merely 500 crores. This is one third of the previous additional outlay of 1,500 crores in just the last quarter of FAME-II subsidy.

Furthermore, in comparison to FAME-II subsidy, the subsidy amount is reduced to 50%, from ₹10,000/kWh to ₹5,000/kWh under the new EMPS policy; capped at a maximum of 15% of vehicles’ ex-showroom prices. Additionally, EMPS has also done away with subsidies for EV 4-wheelers and buses.  India is still at the nascent stage in terms of the EV ecosystem (low EV penetration and sales) and perhaps in need of a long term policy and subsidy support to help promote EVs in the country.

Adding salt to the wound is the fact that the government's move to reduce the subsidy support comes even though large amounts of allocated budget from the predecessor schemes remains unutilised, which could have been allocated in subsequent policy, supporting a higher number of EVs with demand side subsidies.

Impact of EMPS on the EV market

The reduction in the upfront subsidy will significantly impact the ex-showroom price of the EVs. Following is an analysis of the price increase on some of the top selling models in the 2/3/4 Wheeler segment in India.

The move to reduce the subsidies is expected to have an adverse impact on the EV market in terms of EV sales. Infact, a 67 pager “Evaluation of the Electric Vehicle Policy” presented to Lok Sabha in March, 2023 highlights the fact that demand side subsidies have been the major driver of EV sales volume, especially for EV 2Ws in India. As part of global review, it also states how the EV market in China faced issues with EV sales growth upon reduction in subsidies at an early stage and that it had to eventually reinstate the subsidies to aid in growth of the EV market. 

Reduction in demand subsidies has resulted in significant increase in the EV prices in India. Furthermore, OEMs have echoed that it can lead to reduced market growth and EV sales, especially given that India is a price sensitive market. Historically, we have observed a spike in 2W EV sales numbers, when the FAME-II subsidy was revised from 10,000/kWh to 15,000/kWh with also a revised capping from 15% of ex-showroom price to 40% of ex-showroom price of an EV. When a subsidy was revised and reduced back to the initial amount, the EV sales dipped. Interestingly, with the reduction of FAME-II subsidies, OEMs responded by introducing entry level - cheaper models, which are in some way “stripped down” or “spec’d-down” versions of their existing offerings. This helped the sales to eventually jump back to pre-FAME-II subsidy reduction numbers (refer to the chart below).

This perhaps reiterates the fact that India is an extremely price sensitive market, especially when it comes to mass market EVs. What then is the way forward?

Conclusions

One, It is prudent to understand that historically, upfront subsidies have been  a major driver of EV demand generation and has proved as an enabler to develop the EV infrastructure in India. The reduction and abrupt phasing out of demand subsidies seems premature (unless a new policy is announced post elections), since the market hasn’t reached a take-off point yet. It is important to note that two-wheeler EVs have not yet reached upfront price-parity with ICE counterparts. This makes a case to continue the subsidy scheme until price parity is reached. 

Climate Dot forecasts indicate that 2W price-parity is likely to be reached in [2030] (see graph below). We recommend any new policy for the promotion of electric vehicles. in India continue the subsidy with a clear roadmap of reduction of subsidies over time as price-parity is approached. Our recommendation is summarised in the table below.

We suggest that subsidies be calibrated to remain at 80% of the price difference, taking into account fuel cost savings, and also to provide a downward price pressure to OEMs to encourage price reduction.