The fledgling electric two-wheeler industry in the country is likely to suffer a jolt in the near term as the battery-powered two-wheelers are to get lower subsidies with Central Government’s amendments to its flagship incentive scheme (FAME II).

The reduction in incentives coincides with a period of increased growth in the adoption of battery-powered vehicles within the segment.

In several cities, the penetration of electric two-wheelers has crossed double digits now. The proposed move is likely to hurt the sale of electric two-wheelers and may curtail the segment’s growth pace over the short-term.

On May 21, the Ministry of Heavy Industries (MHI) announced certain amendments to FAME II, meant for accelerating electric vehicle (EV) adoption in the country.

Both the capping of on-demand incentive and the incentive per kWh of battery size were lowered from current levels, with the amendments coming into effect from June 1. This amendment comes in the background of the government’s decision to reallocate an additional ₹1,500 crore under the FAME II scheme to the electric two-wheeler segment.

However, the latest amendment materially lowered the subsidy available per vehicle, with the cap on demand incentive lowered to 15 per cent of ex-showroom price from the earlier level of 40 per cent. Also, the subsidy benefits available per kWh were lowered to ₹10,000/Kwh from ₹15,000.

The new cap limiting the subsidy amount to just 15 per cent compared to the original 40 per cent will likely have a higher impact than the reduction in per kilowatt hour amount. Earlier, there was the incentive for OEMs to have bigger batteries to enhance the range, enabled directly by the 40 per cent capping element of the subsidy scheme, says Suraj Ghosh, an EV industry analyst.

For instance, the leading electric 2W models cost about ₹1.2 lakh after subsidy and are equipped with a battery of around 3kWh. These are effectively eligible for ₹45,000 subsidy. Now, the same subsidy will come down to ₹18,000.

While several developed countries are continuing EV subsidies and incentive measures launched long ago, abrupt policy changes in a price-sensitive market like India will only prove to be detrimental to achieving desired targets, say industry representatives.

They say a gradual transition with sustained subsidies would have been ideal to ensure market growth and reach the international benchmark of 20 per cent EV adoption (presently just 4.9 per cent) before tapering off the subsidies.

“With the majority of petrol two-wheelers costing less than ₹1 lakh, there are fewer chances of consumer spending upwards of ₹1.5 lakh just factoring in the total cost of ownership. So, the sudden reduction of subsidy may lead to a major decline in EV adoption, impacting the entire industry for a considerable period,” said Sohinder Gill, CEO, Hero Electric.

Price hikes likely

According to Rohan Kanwar Gupta, Vice-President & Sector Head, Corporate Ratings at Icra, although the price hikes implemented by electric two-wheeler (E2W) manufacturers to counter the subsidy reduction can still be monitored, the upfront price difference between an E2W and an internal combustion engine (ICE) vehicle is projected to notably widen.

The payback period for a premium E2W, which had declined to about three years post the amendment to FAME II guidelines in June 2021, would increase to about 5 years post the latest revision in FAME II benefits. In this scenario, E2W manufacturers decide to completely pass on the subsidy reduction amount to the consumers in the form of price hikes. Nonetheless, the total cost of ownership (TCO) for E2W may be favourable, aided by substantial savings on running costs.

As a consequence of the subsidy cut, EV manufacturers are contemplating price increases, which may affect the sentiments and dent sales in the near term. “We are evaluating price increase in line with the new FAME guidelines,” said Sanjay Behl, CEO & ED, Greaves Electric Mobility Private Ltd.

Tarun Mehta, Co-Founder and CEO of Ather Energy said in his tweet: “We live in the most roller coaster of an industry.” He pointed out the increase and decrease in subsidies between 2019 and 2023. “The industry must stand on its own feet very soon,” he added.