How did India’s flagship electric mobility scheme run into bumps?
What is FAME II?The Faster Adoption and Manufacturing of Electric Vehicles (FAME) scheme was launched in April 2015 under the National Electric Mobility Mission, to encourage electric and hybrid vehicle purchase by providing subsidies. Subsidies are meant to bring a price parity between vehicles that have electric motors and fossil fuel-run engines, thereby nudging buyers to go for the cleaner option. Its first phase ran for four years until 2019.
Under the second phase, FAME II, which ends this financial year, companies can offer a discount of up to 40% on the cost of locally manufactured vehicles and claim it as a subsidy from the government. FAME II started in April 2019 and would continue until March 2024. The due date was extended from March 2022. Under this scheme, The subsidies could range from ₹15,000-60,000 for a two-wheeler.
The FAME-II scheme stipulates that at least 50% of the value addition for an EV should be done locally by EV makers for them to avail of the subsidy, which significantly reduces the final price for the end customer. FAME II aims to support 1 million EV two-wheelers (E2W) and 7,000 electric buses (e-buses).
The centre has offered Rs 10,000 crore as incentives to EV makers from 2019 onwards. These benefits are linked to localisation of vehicles and the eligibility criteria for the benefits have been gradually made more stringent. The government has targeted to disburse Rs 5,000 crore under the FAME II scheme during FY24.
How the rough ride began
Last year, companies getting FAME II subsidies started facing increased scrutiny from the government, after it noticed that many manufacturers were providing misleading information. Many companies had wrongfully declared imported components as locally sourced by routing the imports through local companies who did little value-addition in India. This practice was found to be rampant in the electric two-wheeler sector particularly, where most manufacturers were reliant on Chinese imports.
The government received complaints that some manufacturers were flouting the condition of 50% local sourcing, while many others were reportedly charging separately for parts such as EV chargers and intrinsic software so that a vehicle’s price would be low enough to fall below the subsidy cap.
In October last year, the Ministry of Heavy Industries sent notices to a set of EV makers, including Hero Electric and Okinawa Revolt Motors and Ampere Vehicles, to check if the components used in their vehicles were largely locally sourced. None of the models sold by Hero Electric or Okinawa was identified as eligible for the subsidy. These complaints put the brakes on subsidy dispersal. The subsidies were to be restored only after these EV makers submitted appropriate documentation to substantiate localization claims. The government withheld ₹1,100 crore of subsidy due to 12 electric two-wheeler makers.
There was another kind of irregularity that came to light.
In February this year, ET reported, the government was looking into allegations that four key electric two-wheeler manufacturers were artificially keeping prices of their products lower to claim subsidy. Ola, Ather, TVS Motor and Vida are under the scanner for allegedly mispricing their electric two-wheelers to make them eligible for subsidy.
The government began the enquiry following a whistle-blower complaint that these four companies falsely claimed subsidy of at least ₹300 crore by billing integral parts such as the charger and proprietary software separately from the two-wheeler. Under the FAME programme, subsidies cannot be claimed for electric two-wheelers that have an ex-factory price above ₹1.50 lakh. It is alleged that these manufacturers billed chargers and proprietary software separately to customers in order to price the vehicles below the eligibility threshold required for the subsidy.
The accused companies have refuted the charges of flouting localisation norms as well as mispricing.
An industry stakeholder told ET recently that Covid was the reason behind the industry not being able to localise production at the expected pace. Nearly 80% of the market could not localise completely due to the pandemic. Certain policy tweaks are required during such challenging times, he said.
On the charge of separate invoicing of different parts to bring the price of the vehicle down, the companies say they make the same hardware for different variants and the pricing depends on the performance software installed inside the vehicle. They also argue that some parts could not be as necessary or integral to the vehicle as to be included in the price.
The industry slowdown
The industry body Society of Manufacturers of Electric Vehicles (SMEV) says sudden withholding of more than the ₹1,200-crore subsidy already passed on by the majority of manufacturers to the customers on the pretext of delay in the localisation affected sales of electric two-wheelers in the local market. An additional ₹400 crore is stuck for the manufacturers operating in the premium end of the segment due to allegations of under-invoicing/mispricing to bypass the FAME norms, leading to working-capital challenges.
The suspension of subsidy payment has forced several electric two-wheeler makers to go slow on production and some marginal players to shut shop, ET reported recently citing industry sources.
The companies have already passed on the subsidy benefits to buyers expecting the government to reimburse that, which used to happen within 45-90 days. Since the payment has not come for several months, they are facing a shortage of capital.
At least 26 electric two-wheeler makers are eligible for the subsidy as per the National Automotive Board portal. Of these 11 account for more than 90% of the volume, Sohinder Gill, director-general of the Society of Manufacturers of Electric Vehicles, told ET recently. All these 11 are under one investigation or another with subsidies stopped, leading to the overall monthly sales stagnating rather than the 20% growth expected month-on-month, said Gill, who is also CEO of Hero Electric, one of the companies accused of flouting the norms.
The future of FAME
Though incentives like FAME are tapered off as industry reaches a critical mass, the electric two-wheeler industry is concerned over the uncertainty surrounding the FAME II scheme. The electric two-wheeler market in India is not mature enough yet to absorb discontinuation of subsidies. Imagine, the price of an electric scooter jumping 20,000 all of a sudden.
While the industry has been pressing for extending the incentives offered under the FAME II, the government may roll out the next phase only if the funds allocated for it are not fully exhausted at the end of the current financial year,
The government is also likely to discontinue the FAME scheme after this financial year, ET reported last month. The Centre could instead offer incentives to EV makers through ongoing production linked incentive (PLI) programmes to support the sector. “We are unlikely to extend the scheme beyond FY24,” a senior government official told ET, adding that key FAME II goals would be achieved by then. FAME II aimed to support 1 million EV two-wheelers (E2W) and 7,000 electric buses (e-buses).
In FAME II, the subsidy is disbursed at the point of sale of the vehicles. But under the PLI scheme, benefits will be offered at the manufacturers’ end. This will be through PLI programmes covering advanced chemistry cell (ACC) battery storage, automobiles, and auto components.
