Globally, there has been a close correlation between incentives for Electric Vehicles and market penetration of EVs in a country. Hence, wherever and whenever the government has pushed incentives to lower the cost of EVs, more EVs have been sold. Historically, this is due to the unfavourable unit economics electric vehicles have had relative to ICE vehicles.
Norway was one of the first countries to incentive EVs at scale in the early 1990s. They started by removing import taxes in 1990 and then 25% VAT on electric vehicle purchases in 2001, amongst other incentives. But parallely, they also placed a higher cost on higher polluting ICE cars by imposing taxes based on a combination of weight, CO2 and NOx emissions.This has made the purchase price of EVs fall below ICE vehicles, spurring demand.
By 2020, EVs had almost a 55% market share of new vehicle sales in Norway. With over 12% of total car parc now consisting of pure EVs already, the Norwegian Parliament has a target to have 100% of all new cars sold by 2025 to be zero-emission vehicles.
The other country showing the way is China, which started their EV journey in 2009 with the launch of a pilot providing demand side subsidies for buying electric buses and taxis in 13 cities in China. Since then, the scale has only grown with over $60bn invested in the EV ecosystem over the last 10 years with 60% of this amount being spent on subsidising costs for EV buyers.
In India as well, it has been over 10 years since the first policy support was implemented by the Ministry of New & Renewable Energy (MNRE), under the Alternate Fuels for Surface Transportation Programme (AFSTP) scheme. AFSTP had a total planned outlay of Rs 950 bn over FY11 and FY12 with the following objectives:
- Support for dissemination of all types of Battery Operated Vehicles (BOVs), Plug Hybrid Vehicles (PHEVs), Hybrid Electric Vehicles (HEVs) and Electric / Exercise Bike Generator Inverter (E2BI) for their usages by users for surface transportation.
- Support for R&D projects on advanced high energy density batteries, ultra capacitors, control systems and other components for BOVs, PHEVs and HEVs for surface transportation.
- Support for pilot projects on technology demonstration for BOVs, PHEVs, HEVs and E2B1s for field performance evaluation and leading to commercialization.
- Support for projects and activities related to awareness promotion through education and training, organization of business meet and seminars/conferences/symposia in the area of BOVs, PHEVs and HEVs etc.
The policy aimed to provide subsidies for upto 100,000 low speed 2Ws, 30,000 high speed 2Ws, 266 3Ws and 840 4Ws. The subsidy was equal to 20% of the ex-factory price of the vehicle and eligible OEMs had to have min 30% indigenous components, provide a 1 year warranty on the vehicle and set up at least 15 service stations in India.
By 2012, boosted by the AFSTP subsidy, the electric 2W industry was growing with over 30 OEMs selling almost 100,000 units.
Discontinuation of the subsidy in 2012 by the MNRE led to volumes collapsing to around 20,000 within a year with many OEMs shutting shop and the ecosystem getting dented for a period.
In 2013, the National Electric Mobility Mission Plan 2020 (NEMMP) was launched with a vision to establish an EV ecosystem in India and aimed to achieve yearly sales of 6-7 million BOVs, PHEVs and HEVs in India by 2020. NEMMP wanted to utilize EVs as an opportunity to achieve global leadership in manufacturing of EVs and expansion of the domestic market by providing an initial boost that could create demand for EVs, which would stimulate the manufacturing of these vehicles at scale. The four key principles that guided the future roadmap for EV penetration in NEMMP included:
- Creating consumer acceptability for EVs
- Developing infrastructure to support ownership and use of EVs
- Development / acquisition of EV / battery technology
- Creation of local manufacturing capability
Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME I) was introduced in 2015 for an initial period of 2 years to implement the vision of NEMMP with four focus areas that include demand creation, technology platform, pilot projects and charging Infrastructure. FAME I policy was modified along the way with inclusion of electric buses as a category for demand side incentives in 2017 and also saw multiple extensions till 31st March 2019.
FAME I had planned a total outlay of Rs 8.95 billion including the extensions, however, only 60% of planned expenditure was achieved including Rs 3.43 billion on demand incentives on 2.78 lakh EVs.
Policymakers in India, introduced FAME II in 2019, which extended the implementation with a larger Rs 100 billion outlay over 3 years. The Rs 100 billion outlay under FAME II is focused on 2 aspects: demand side incentives and charging infrastructure. Demand side incentives for customers account for almost 86% of the funds and within this, the focus is on light electric vehicles and electric buses.
2Ws are only category under FAME II, where an exception has been made and demand side incentives are available for vehicles purchased for personal use.
On the charging infrastructure, a total outlay of Rs 10 billion is envisioned with a target to setup 2700 charging stations.
The government is also implementing a Phased Manufacturing Program (PMP) to promote and develop a local EV supply chain for key components. As part of the PMP program, they are taking 2 steps:
- Increasing or introducing customs duty on key components by April 2021.
- Mandating local sourcing for key components by specific deadlines to be eligible to avail the demand side subsidies under FAME II. Many of the dates specially for 2Ws/3Ws were in 2019 and 2020, but have been pushed out given the on-ground scenario in September 2020.
FAME II policy incorporated some learning from FAME I and included earlier excluded categories like e-rickshaws and also excluded vehicles using lead acid batteries. This in our view was a positive decision, as e-rickshaws are a category that has shown product-market fit growing rapidly, organically without any large organised OEM to 1.5mn+ vehicles. Majority of these vehicles operate with lead acid batteries currently, but aided by the FAME II policy, they have even started to shift to Li-ion batteries and we expect 40-50% penetration within 5 years.
The policy also linked the demand side subsidy provided to end users with battery capacity (as opposed to vehicle types under FAME I) in an effort to promote more efficient vehicles. Furthermore, for categories like 2Ws, they introduced stringent eligibility conditions including localisation norms, min speed (40 kmph) and range (80 km) criteria. Many question this step, as batteries constitute 30-40% of the cost of the vehicle and in order to give more range you need larger batteries, which push up the cost of the vehicle and defeats the primary objective of making these vehicles more affordable.
Unfortunately, FAME II conditions for availing demand incentives for 2Ws were not in line with market demand and hence progress has been slow with only 3% electric 2W targets met with almost 60% of time elapsed.
India is a very price sensitive country and the majority of demand is for lower speed, cheaper electric vehicles, hence providing incentives to such vehicles can quicken the adoption. Similarly, the Government may even look at bringing personal 4Ws into the fold, however, penetration in this category may still take time given the challenges around economics, lack of models and reliance on availability of a robust public charging infrastructure.
Incentives are a good kickstarter, but can only go so far, especially for a capital starved country like India. Eventually, the Government will probably need to look at regulation to push the incumbents into serious action and this can take multiple forms like implementing stricter emission norms or introduce extra taxes on ICE vehicles to increase the cost of auch automobiles or even setting realistic adoption targets for EVs.
The government could mandate an EV adoption target for OEMs like China did with the New Energy Vehicle (NEV) credit policy, which was modeled after the Zero Emissions Vehicles Program (ZEV) implemented in California. As part of the NEV credit policy, OEMs have to earn credit points by sale of EVs and the points required increase yearly with penalties for non-fulfilment (credits can also be traded between automakers).
However, while implementing any such adoption targets, the Government must ensure a smooth transition to an electric auto ecosystem without disrupting the auto industry.
There has been some talk of an EV adoption mandate for fleet aggregators like Ola and Uber in the past. However, what is clear from the FAME II policy and subsidy structures, etc is that the Governments wants to focus on EV adoption for small vehicles (2W, 3W) and public transportation (Buses) in the first few years to make an early impact. We may not expect any immediate mandating of EVs by large fleets, as the current upfront cost differential is substantial, not many models are available, charging infra is not widely available, etc and in marketplace models like Ola/Uber, the driver decides what vehicle to purchase (unlike models like BluSmart). This could however change in a few years as battery prices reduce, model availability increases, charging infra becomes available, etc.
In August 2020, the Ministry of Road Transport and Highways (MORTH) clarified that OEMs could sell electric vehicles without the batteries. This was a very welcome move by many, as it could potentially reduce the upfront cost of a vehicle, which is one of the most critical factors holding back adoption. The Government may even consider extending incentives for setting up EV charging stations to battery swapping providers, which we believe can play a critical role for some categories of light electric vehicles.
From a taxation front also, GST has been reduced from 12% to 5% for EVs and the Government could further reduce GST rates and also extend these benefits to replacement batteries, hybrid vehicles, as well as battery swapping providers, which currently pay 18% GST. Additionally, there is an income tax benefit available for interest paid on an EV loan. However, feedback from the market indicates that only a small fraction of electric 2Ws are financed versus the large majority of ICE 2Ws. Hence, the Government should consider providing tax exemptions on purchase of EVs to have a more meaningful impact.
The policymakers can also look at a range of options impacting both demand and supply like reduction of import duty for non-light electric vehicles & lithium-ion cells, increasing the subsidy provided per kWh of battery (without changing total outlay) and bringing EV financing under priority sector lending.
In the past, Government’s EV policy has flip-flopped to some extent, but ever since the implementation of FAME I, the Government has shown its intent to move in the right direction and support this transition to EVs.
Like its predecessor, the FAME II policy could also see extensions beyond its planned 3 year life and we hope the Government once again takes industry and market feedback into consideration to make suitable modifications, as they did with FAME I earlier.