On May 19, the Ministry of Heavy Industries announced a reduction in subsidies provided under the FAME II scheme for electric two-wheelers, effective June 1.
While this has resulted in a price increase of 20-25% for electric two-wheelers, “a closer examination of several key factors is necessary to gauge the impact of the price rise on the trajectory of electric vehicle (EV) adoption in the country,” Manish Saigal, managing director at Alvarez & Marsal, the global professional services firm, told FE.
India’s EV sector
The total cost of ownership (TCO) of an EV is lower as compared to an ICE vehicle (those using conventional fuels), but the upfront cost of EVs is typically higher. This is driven by battery cost, which is 40-45% of the vehicle cost. India relies heavily on imports of lithium-ion cells used in EV batteries, with the majority coming from China and Korea. These imports inevitably raise the cost of Evs.
But Saigal said that the government’s Production Linked Incentive (PLI) scheme is actively promoting the localisation of battery manufacturing and related EV auto components like motors and powertrains, which will help indigenise EV production. “Moreover, with increasing global adoption of EVs, li-ion cell costs are expected to continue their downward trend as utilisation levels improve across the cell value chain,” he said. “Localisation, along with reduction in cell cost, is expected to lower the vehicle cost by 4-5% year-on-year.”
Therefore, in about two years, the gap in the upfront cost of EVs created by the subsidy reduction is likely to shrink, making TCO even more attractive. Saigal added that as the EV sector develops, it is expected to offer more favourable loan terms, which will take off the pressure of high upfront costs for end-consumers.
Impact of subsidy cuts
While in the short term subsidy cuts may lead to higher prices of electric two-wheelers, the eventual outcome will be a considerable reduction in cost for consumers. Saigal added that in a recent Alvarez & Marsal study of over 2,500 end-consumers, 70% said they would consider buying an electric two-wheeler over an ICE vehicle.
“Other countries have successfully rolled back subsidies with minimal impact on EV adoption,” he said. “China, which is at the forefront of energy transition, has tapered off EV subsidies. Data from the China Association of Automobile Manufacturers shows that during the seven years that China phased out EV subsidies, while sales dipped in the first month after each rollback, absolute sales figures in the seventh year of the rollback were substantially higher than those in the first year of the rollback.”
Subsidies play a vital role in promoting awareness and encouraging the adoption of products in emerging sectors like EVs. But offering subsidies indefinitely is not a sustainable approach.
“Ultimately, the industry needs to stand on its own feet and foster innovation to ensure its long-term viability,” he said. “The government’s responsibility lies in creating an ecosystem for a nascent sector. Once it is established, the industry must move forward independently.”
Many countries have rolled back subsidies with minimal impact on EV adoption: Alvarez & Marsal
