FAME Subsidy Cut May Force Smaller Electric Scooter Makers To Exit

The government’s decision to reduce subsidies on electric two-wheelers will lead to lower sales in the segment and force out the smaller players from the market.

The step is in the right direction, but sales will be impacted as the industry may not be able to match the numbers it clocked in the year ended March 2023, industry participants and experts told BQ Prime.

"This year is going to be challenging for the EV two-wheeler industry, especially for small players," said Puneet Gupta, director at SP Global Mobility. "After the introduction of the PLI scheme, the government has been eyeing to reduce Fame II subsidy. However, this could be a dual setback for the companies in the ongoing fiscal as big players are yet to localise the entire supply chain and may have to pass on the impact to the customers, and higher upfront costs may discourage buyers," he said.

Under the second phase of the Faster Adoption and Manufacturing of Electric Vehicles in India, or FAME, scheme, the subsidy for electric two-wheelers was reduced to Rs 10,000 per kWh of battery capacity from Rs 15,000 earlier, while the overall incentives were capped at 15% of the vehicle’s ex-showroom price, a steep cut from 40% earlier.

The biggest jolt to the market will be the higher upfront prices, as most of the potential buyers are yet to be convinced of the savings through the lower running costs of EVs compared with a conventional two-wheeler.

With the latest subsidy cut, an electric two-wheeler is going to cost the consumer 45–50% more than an equivalent petrol-powered vehicle, according to ICRA. The difference was just 15–20% before the government announced the subsidy cut, effective June.

Customers that earlier used to get a subsidy discount of Rs 50,000–60,000 on the highest-selling electric scooters like the Ola S1 Pro, Ather 450X, and TVS Motor’s iQube will now get a discount of only Rs 22,500.

This means the target to achieve lower emissions through higher penetration of EVs may hit a speed bump.

ICRA cut its estimate of electric two-wheeler penetration by FY25 to 10-12% from 13–15% earlier but kept the target for FY30 unchanged at 30%. Electric vehicles currently constitute nearly 5% of overall two-wheeler sales.

The government’s move has come as a shock for many smaller players who were just starting out in the industry, many of whom displayed new products at the Auto Expo earlier this year.

With lower sales in the coming months, a majority of these smaller players may find it hard to sustain their operations as new rounds of fundraising may also be at risk.

"We were close to raising money for further expansion, but this announcement has come as a shock. It has put question marks on whether the new funding round will happen within the deadline that was fixed earlier," an executive with one such company told BQ Prime on the condition of anonymity.

The time may have come for consolidation in the industry, which has seen a flood of new players in recent years, leading to concerns about poor quality.

"The number of players is quite high in the industry. As the subsidy reduces, customers will increasingly look for a few trusted and proven brands," said Hemal Thakkar, director of consulting at CRISIL Market Intelligence and Analytics.

As a result, the bigger and more established players may find themselves in an environment well-suited for their growth.

Any sort of subsidy corrupts the decision-making processes on both the customer's and company's sides, Rakesh Sharma, executive director at Bajaj Auto Ltd., said during the launch of its first Chetak store in Delhi last month.

"From an original equipment manufacturer's, or OEM's, perspective, you cannot subsidise and create an industry. It has not happened. It has not succeeded. I feel that over a period of time, they should take it off," he said.