FAME 2 Reduction

Implication of FAME 2 reduction on Indian EV Market

 

In 2015, the Indian government introduced the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) scheme to spur demand for electric vehicles (EVs) by providing incentives to manufacturers and buyers. The second phase of this program, known as FAME-2, commenced in 2019, allocating Rs 756.66 crores (USD 15 billion) to reduce the battery cost of EVs and subsidize electric two-wheeler purchases. 

However, the EV FAME-2 subsidy ends in March 2024. The government has rejected the proposal for its extension, sparking concerns about the future of India’s EV industry. Read this article to understand the thinking behind this decision and its potential impact.

Overview of the EV FAME-2 Subsidy

The FAME-2 subsidy came into effect in April of 2019, to encourage India to transition from traditional vehicles to EVs. The FAME 2 subsidy was allocated 500 crore in FY20, revised to 318 crore in FY21, and increased to 800 crore in FY22. The goal was to generate demand for 7,000 e-buses, 500k electric three-wheelers, 55k electric four-wheelers, and 1,000,000 electric two-wheelers. 

FAME-2 reduced EV purchase prices to incentivize buyers. The discount varied depending on the battery capacity since batteries were the main contributor to the high cost of EVs.

The scheme also aimed to boost infrastructure by incentivizing EV charging and expanding India’s charging infrastructure. These measures have substantially benefited the EV industry, especially by raising awareness, reducing pollution, and increasing jobs. 

FAME-2 Subsidy Discontinuation – What are the Reasons Behind it?

The EV FAME-2 subsidy will end on March 31, 2024. The government decided against extending it, primarily because of accusations of widespread malpractice and noncompliance with the program’s guidelines. 

Certain EV manufacturers allegedly circumvented price caps by invoicing software and chargers separately from the electric vehicles, thereby undermining the subsidy’s intended benefits. They may also have violated the localization requirement, which mandated that at least 50% of auto parts be manufactured in India. If these practices are occurring, they would hamper domestic manufacturing growth.

Furthermore, several industry experts and stakeholders suggested that the incentive was less effective than anticipated. They argued that to sustainably drive EV market growth, India would need to implement a more holistic approach, accounting for critical factors such as infrastructure challenges and battery technology advancements.

Due to all of these issues, the government opted to discontinue the FAME-2 subsidy in favor of exploring alternative strategies to support the electric vehicle market in India.

5 Potential Implications of the FAME-2 Discontinuation

Discontinuing the FAME-2 subsidy could have a significant impact on EV dealers and India’s entire EV industry. Implications of the discontinuation may include:

  • Higher EV Prices

The subsidy played a key role in keeping EVs affordable. Without it, prices are likely to rise, reducing demand for EVs by making them less attractive to Indian consumers.

  • Exodus to Foreign Markets

The discontinuation of the FAME 2 subsidy has made it more difficult for Indian EV manufacturers to compete in the Indian market, but it has also opened up opportunities for them to enter the global market.

  • Increased Focus on Charging Infrastructure 

Higher prices for EVs will make consumers prioritize affordable and convenient charging options. As a result, discontinuing the FAME-2 subsidy could catalyze charging infrastructure development.

  • More Competition Among EV Manufacturers

To justify their vehicles’ high prices, EV manufacturers will need to offer particularly desirable features. The resulting competition could lead to more innovation in the space, improving EVs and eventually lowering prices. In the long run, this could spark more demand for EVs.

  • Technological Innovation to Improve Performance and Range

EV manufacturers will need to up their game, when it comes to vehicle performance, to provide customers with better features and attract a bigger audience. This may result in technical disruptions, leading to smarter and more efficient EVs.

The Indian EV industry is still in its early stages. To ensure its continued growth, various stakeholders are collaborating, and government entities, to address the challenges posed by the EV FAME-2 subsidy discontinuation. 

Alternatives to the FAME-2 Subsidy

In the absence of the FAME-2 subsidy, India may explore alternative strategies and government policies for EVs.

Strengthen Infrastructure

Stakeholders could accelerate India’s transition to electric vehicles by focusing on robust EV charging infrastructure development. They could invest in charging stations across urban centers, highways, and rural areas; form public-private partnerships for faster deployment and cost-sharing; and address range anxiety by installing smart charging networks and fast-charging stations.

Introduce Tax Incentives and Rebates

India’s government could encourage EV adoption by implementing new tax incentives and rebates. For example, they could mitigate cost concerns by reducing taxes and providing rebates on EV purchases, or lower goods and services tax (GST) rates and registration fees.

Encourage Domestic EV Manufacturing 

Stakeholders and government entities could boost the EV industry by stimulating domestic production. They could incentivize automakers and original equipment manufacturers (OEMs) with tax benefits, research grants, and subsidies, as well as fostering employment opportunities.

Establish Strategic Partnerships

Stakeholders may be able to boost growth by collaborating not only with each other but with foreign players as well. They could facilitate technology transfer and market access by forging international alliances; accelerate innovation by collaborating with global EV manufacturers and research institutions; and promote India as a leader in the global EV market through bilateral agreements.

These measures could comprise an effective long-term approach to support the transition to EVs in India.

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