From June 1, the subsidy given to electric two-wheelers will be drastically cut under the government’s Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme From 10,000 per KwH 15,000 per KwH, reduced from 40% to 15% of the total cost of a two-wheeler with the maximum subsidy permissible. This has disappointed many manufacturers. With the economy of EVs still significantly lower than that of conventional fuel vehicles, the increase in prices due to this subsidy cut could significantly reduce demand. EVs are expected to be as expensive as two-wheelers 30,000. This can bring prices closer 150,000 mark, substantially widening the gap with conventional two-wheelers, many of which sell well 100,000. In India’s price-sensitive market, this could tilt the consumer’s value proposition curve. Manufacturers of conventional two-wheelers are looking forward to the move to correct the distorting effect in market pricing due to these subsidies. Of course, their motivation may be due to the threat that EVs present to their future.
Still, it cannot be denied that subsidies distort the playing field to the detriment of those who do not receive them and in favor of those who do receive them. India’s retail fuel market is an example. Private participation has not increased due to subsidies for state-run retailers. It aims to keep inflation under control as fuel prices affect the prices of almost all commodities through transportation costs. But for consumers, it limited choice, depriving them of the benefits – through better products and lower prices – that a free and competitive market should bring. These distortions exist in the two-wheeler market as well. While EVs may still have a small share of the overall market, traditional two-wheeler manufacturers may have reason to claim that this has come at least partially at their cost. Also, subsidies have been cut, not eliminated. Hence, incentives continue, albeit limited, apart from other state benefits, such as exemptions in registration taxes and lower rates of Goods and Services Tax that EVs still enjoy.
To be sure, subsidies can be a valid policy tool to stimulate demand and production in areas where policy attention is needed. In this case, the government is clearly stating its intention to see a shift to green mobility. It committed to subsidize the sale of 1 million electric two-wheelers, which has been largely achieved. That’s probably why it scaled back support. But it can also fault the industry for failing to increase local production in return for its support. So, when it proceeded on the back of state support, it may have let down the policy. Despite this growth, however, their share of less than 10% in total two-wheeler sales is still small, and electric two-wheelers have a long way to go in the green transition. Ideally, once sales reach an inflection point from where the industry is able to sustain itself on its own, the subsidy should be withdrawn. Of course, that point has not yet been reached. Battery cost, which forms the bulk of EV cost, is quite high. Also, India’s EV infrastructure hasn’t kept pace. But subsidies cannot continue forever. The government has largely gone back on the promise. The time has come for EV makers to start getting used to surviving without state support. This could be exactly the nudge they need to be competitive.
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Updated: June 01, 2023, 12:58 AM IST