Electric mobility promotion scheme to keep the electrification pace intact: ICRA

The announcement of the Electric Mobility Promotion Scheme 2024 is a timely move by the Government of India to support electric vehicle adoption in the country as the FAME-II subsidy scheme is about to end on March 31, 2024, according to rating agency ICRA.

The new scheme offers reduced subsidy benefits on a per vehicle basis than the existing FAME-II guidelines. As per ICRA’s calculations, the initial purchase cost of an e-2W would increase by close to 10% compared to that with the FAME-II subsidy. Moreover, this would make an e-2W over 70% costlier (in terms of initial purchase price) than a petrol scooter.

ICRA sees the reduction in subsidy benefits as a short-term impediment for e2W manufacturers that could exert pressure on cost structures. “If price hikes are not completely passed on, the pick-up in volumes is expected to partially mitigate the impact. Nevertheless, their ability to ensure timely fund raise to support the capital structure or competitiveness of manufacturers would be the key,” stated ICRA.

On March 13, 2024, the Ministry of Heavy Industries, Government of India, announced the Electric Mobility Promotion Scheme 2024 with a total outlay of INR 500 crore to support the adoption of e-2Ws and e-3Ws (including e-rickshaws, e-carts, and L5 category vehicles) for a period of four months from April 1, 2024 to July 31, 2024. Around two-thirds of the outlay is proposed to be earmarked for e-2Ws.

As per the scheme, the subsidy for e-2Ws has been reduced to INR 5,000/kWh of battery capacity from INR 10,000/kWh earlier with a cap of INR 10,000 per vehicle for e-2W (from 15% of ex-showroom price earlier), INR 25,000 for e-rickshaw/e-cart and INR 50,000 for L5 category e-3Ws, respectively.

Shamsher Dewan, senior vice president and group head – corporate ratings, ICRA, said, “The Government’s announcement to offer incentives under a new scheme for e-2Ws and e-3Ws will continue to provide a disruption-free environment for e-2W OEMs just before the FAME-II scheme was about to end. Although the reduction in the subsidy benefit is a short-term impediment and may impact demand to some extent, OEMs will continue to strive to offer competitive products by leveraging their cost structure through localization of key components and value engineering capabilities. In addition, softening in battery cell prices (which accounts for almost 40% of the vehicle cost) will also help them offset the impact of lower subsidies to some extent.”

ICRA estimates the payback period could get elongated to 5.5 years vis-à-vis five years under the FAME-II framework, in a scenario wherein the e-2W manufacturers completely pass on the subsidy reduction amount to the consumers in the form of price hikes.

However, the long-term potential for e-2W segment remains favourable aided by the improving cost of ownership vis-à-vis ICE vehicles and enhanced customer confidence with regard to range anxiety, financing avenues, and other vehicle attributes such as safety.

In addition, the Government’s focus on promoting electric vehicles through various initiatives (including PLI) will continue to drive electric vehicle adoption over the medium term.

ICRA expects penetration of e-2Ws to inch to 6-8% in the overall industry by FY2025 as compared to approximately 5% at present.