Electric two-wheeler (e-2w) penetration in India is expected to rise only marginally from 5.8 per cent in FY23 to 6 per cent in FY24. Around 80 per cent of these are high speed two-wheelers that can run at more than 50 km/hour and compete with their internal combustion engine (ICE) counterparts. In the case of electric 3-wheelers (e-3w), while penetration is expected to rise to 58 per cent in FY24, increasing from 52 per cent in FY23, 85 per cent of these are low speed e-rickshaws, mostly running on lead acid batteries.

By 2030 however, the government intends to have an electric vehicle (EV) sales penetration of 80 per cent for two- and three-wheelers with focus on lithium-ion vehicles. But for this to happen, the higher upfront costs that consumers pay up today need to come down.

In June 2023, subsidy for e-2Ws under Faster Adoption and Manufacturing of Hybrid & Electric Vehicles (FAME) scheme was brought down to ₹10,000 per kwH and was capped at 15 per cent of the ex-factory price of the vehicle. Prices subsequently increased for the consumer as OEMs took average price hikes of 20-25 per cent. This resulted in sales volumes steeply declining as upfront cost difference for EVs became even more starkly higher compared to ICE vehicles. However, the total cost of ownership (TCO) of e-2w measured in rupees per km for usage of 10,000 km per annum remained significantly favourable compared to similarly priced ICE vehicle by around 35 per cent, driven largely by lower running cost of electric vehicles.

FAME subsidy

But if the FAME subsidy were to be discontinued post FY24, the TCO advantage for e-2W will get diluted. Similarly, for e-3w with FAME, TCO for running 30,000 km per annum remains favourable compared to ICE vehicles by around 20 per cent. But will the TCO advantage be enough to drive faster penetration in both e-2w as well as e3w vehicles? Upfront cost is a key decision-making factor in vehicle purchase. Given that around 60 per cent of ICE vehicle sales are estimated from rural and semi-urban areas, lower upfront costs will help accelerate penetration in these regions.

Two-thirds of 2W ICE sales are estimated to be in vehicles priced in the ₹50,000 to ₹1 lakh range. However, in the case of EVs, upfront costs are 25-40 per cent higher than ICE vehicles and there are not enough options in e-2ws in the same price range — most models are priced above ₹1 lakh (even after FAME subsidy). The lack of charging infra also plays a role as range anxiety drives customers towards high-priced top EV models (above ₹1 lakh) that come with superior reliability on range.

Similarly, in the case of 3W, upfront costs for EVs are higher as compared to their ICE counterparts. For instance, the top 3W ICE models in India, including Bajaj Maxima, Bajaj RE in passenger segment and Bajaj Maxima in Cargo segment (together constituted around 60 per cent domestic sales in ICE 3W in FY23), have their EV counterparts priced 25-30 per cent higher. In the absence of FAME, this differential further increases for lithium-ion vehicles.

Continuing with subsidies till battery prices come down and there are enough EV models below ₹1 lakh (in the case of e-2w) makes logical sense for accelerating adoption. Availability of more EV models with price below ₹1 lakh and comparable performance (vis-à-vis ICE) will be the tipping point. This is likely to happen with falling commodity, battery prices and learning curves. Over a period, with improved charging infra, the range anxiety in below ₹1 lakh priced EVs will also reduce.

By 2025, battery prices are expected to reduce by up to 20 per cent owing to reduction in processing costs and prices of key raw materials such as lithium, nickel, etc., further accelerating EV adoption. And with a 60 per cent share of two-wheelers in India’s petrol consumption, FAME benefits in terms of lower oil imports far outweigh the outlay.

Rakesh is Group Head, and Sudip is Senior Executive Vice-President, HDFC Bank