Electric vehicles have emerged as a viable and promising solution to address the pressing issue of greenhouse gas (GHG) emissions, which contribute to global warming. However, the widespread diffusion of electric vehicles faces significant barriers, including a higher initial cost of ownership, range anxiety, longer charging times, unknown resale value, total cost of ownership, perceived risk, etc. To overcome the barriers to EV adoption, the FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) scheme was launched by the Indian government in 2015. The scheme had undergone subsequent phases with revised guidelines and ended in March 2019.
The FAME-2 subsidy programme was launched on April 1, 2019, with an initial validity until March 31, 2022. However, in June 2022, the scheme was extended until March 2024. During the same period, the Ministry of Heavy Industries raised the incentives from Rs 10,000/kWh to Rs 15,000/kWh of battery capacity. This increase in incentives also led to a rise in the subsidy cap for electric two-wheelers, going from 20% to 40%, which resulted in a reduction in the upfront cost of EVs. In the last five years, the diffusion of EVs in India has seen a steady growth, with FY 2022–23 ending with 1.1 million vehicle sales at a 5.4% rate of diffusion overall and electric two-wheelers in particular at 4.6%.
However, under the amended FAME-2 scheme implemented on June 1, 2023, the subsidies for electric two-wheelers have been reduced from Rs 15,000/kWh to Rs 10,000/kWh. Additionally, the maximum subsidy for eligible electric two-wheelers is down to 15% from 40% of the ex-factory price. This has created a cash flow burden on EV makers, leading to increased vehicle prices. For example, OLA Electric raised the prices of its OLA S1 Pro by Rs 15,000; Ather Energy increased prices by around Rs 32,500; and TVS Motors’ iQube prices increased from Rs 17,000 to Rs 22,000, depending on the variant.
The decision to reduce EV subsidies is not unique to India; even China gradually phased out its national subsidies, as the EV market matured. The impact of ending the subsidies in China was mixed. While it raised the cost of EVs for consumers, automakers were compelled to compromise on EV quality to remain competitive.
According to a research paper by Rouso and Ribeiro (2020) titled “The influence of countries’ socioeconomic characteristics on the adoption of electric vehicles,” most European countries are projected to achieve 100% EV adoption by 2045, whereas India is expected to achieve 50% by 2046 and 100% by 2062. The successful diffusion of EVs in European countries is propelled by the subsidies offered by their respective governments, making EV costs comparable to conventional vehicles.
India, as a developing country with a GDP per capita of approximately 2300 USD per annum, faces unique challenges. Only 30% of its population falls into the middle-class segment, with limited disposable income compared to developed countries with higher average GDP per capita. In this context, subsidies play a significant role in making EVs affordable for the common man.
Geoffrey A Moore’s “Crossing the Chasm” theory emphasises that achieving sustainable and widespread diffusion of EVs requires surpassing a critical threshold of 16% market share within the targeted population. This threshold indicates the transition from early adopters to the early majority, bridging the chasm for reaching critical mass and increasing visibility, accessibility, and social acceptance of EVs.
Therefore, it is crucial for India to continue providing subsidies to encourage the adoption of electric vehicles until the country reaches a significant threshold of a 16% diffusion rate. Simultaneously, there should be a strong emphasis on fostering the growth of the Indian electric vehicle ecosystem, aligning with the ‘Make in India’ and ‘Aatmanirbhar Bharat’ initiatives to promote localisation of EV components. This localisation can result in cost reductions and improved affordability for electric vehicles compared to conventional vehicles.
(Babu A is a research ccholar and Biplab Sarkar is professor, Dept of Management Studies, PES University, Bengaluru.)