India Tightens Release of FAME-2 Subsidies for EV Makers, May Not Extend Scheme

Indian electric vehicle (EV) makers are being subject to tightened scrutiny over their eligibility for FAME-2 subsidies due to insufficient domestic value addition. Moreover, investors should note that the scheme could be discontinued after the next fiscal year, if recent news reports are to be believed, even as EV companies seek an extension beyond FY2024.

The FAME-2 scheme is the second phase of India’s flagship program to subsidize the manufacture and sales of electric vehicles. Going forward, the government may instead focus on supporting the EV industry via ongoing production-linked incentive programs for battery manufacturing and auto/auto parts, tax cuts, fee waivers, etc. We briefly touch on some of these measures in this article.

Indian electric vehicle (EV) makers have been subject to an ongoing probe over the misuse of subsidy allocation under the FAME-2 scheme and non-compliance with the standards required to be eligible for these subsidies. FAME-2 is the second phase of India’s flagship promotion scheme for clean mobility technology – Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India.

As per media reports, three-wheeler manufacturers, including Victory Electric Vehicles, Thukral Electric, and Best Way Agencies, have had their subsidies paused. Reasons for the expiration of subsidies include sourcing imported parts for vehicle production or using unapproved outdated battery technology. For some companies like Atul Auto, Euler Motors, and Dilli Electric, subsidies have stopped due to delays in compliance certification or discontinuation of the certified vehicle.

In December 2022, the Ministry of Heavy Industries said it had received complaints against 12 companies, including Hero Electric and Okinawa Autotech. Prior to that, the government had paused the release of FAME-2 subsidies in May when it first received these complaints. Subsequently, as reported by ET, the subsidies were released for companies that proved their compliance to the FAME-2 scheme.

Speaking at an event in March [Atmanirbhar Excellence Awards and Technology Summit 2023 hosted by the Automotive Component Manufacturers Association of India (ACMA)], the commerce and industry minister Piyush Goyal urged the auto components industry to increase investments and R&D to develop new technology, designs, and products to push forth India’s indigenization and localization efforts. The minister called upon the auto industry to procure local and support small suppliers to indigenize the entire value chain.

How EV makers qualify for FAME-2 subsidies

To qualify for FAME-2 subsidies, EV original equipment manufacturers (OEMs) must demonstrate that at least 50 percent of the components in their vehicles are manufactured in India and locally sourced. The Automotive Research Association of India (ARAI) tests this localization percentage before the EV is certified for sales.

The policy is part of India’s phased manufacturing program to steadily grow the in-country component manufacturing ecosystem for EV vehicles.

The government is able to track the domestic value addition (DVA) of EV companies by connecting OEMs enterprise resource planning (ERP) software with its own application programming interface (API) to maintain transparency on compliance and traceability of product manufacturing. This IT-enabled linkage between beneficiaries’ ERP and the nodal ministry’s portal was set to be in effect from October 1, 2022.

The IT-enabled system based on Application Programming Interface (API) would enable smooth transfer of a set of critical data related to domestic value addition (DVA) from the beneficiaries’ existing enterprise resource planning (ERP) systems to the nodal ministry’s portal along with traceability of products based on digital footprints from October 1.

This data will assist in the disbursal of incentives for automakers seeking support under FAME-2 and the production-linked incentive programs. 

FAME-2 scheme may soon be discontinued

The government appears to be dissatisfied with the outcomes of the FAME-2 scheme, as a key goal has been homegrown innovation and value addition during the manufacturing and assemblage process. India is keen to develop capacity in its legacy automotive and auto parts industries to cater to electric vehicle production and the clean mobility sector. 

Reporting by ET quotes unnamed government officials saying that the FAME-2 scheme may be stopped after the next fiscal year, and that industry should not expect an extension beyond FY 2024.

Instead, fiscal allocation by the government may focus on ongoing PLI programs for higher value and technologically advanced automotive and auto component manufacturing and ACC battery manufacturing, besides promoting GST reductions, fee exemptions, etc.

According to ET, about 800,000 electric two-wheelers and 3,500 electric buses are likely to be in use in India by the end of March. 

What is the FAME-2 scheme?

The FAME-2 India scheme was launched with an outlay of INR 100 billion (US$1.22 billion) to incentivize demand for EVs by providing upfront subsidies and creating EV charging infrastructure. The scheme hopes to support 1 million electric two-wheelers, 500,000 electric three-wheelers, 55,000 electric cars, and 7,090 electric buses through subsidies.

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The scheme also allocates INR 10 billion (US$122.98 million) for the provision of EV charging stations. In 2022, 2877 EV charging stations were approved in 68 cities across 25 states and union territories. A total of 1576 charging stations were sanctioned across nine expressways and 16 highways.

The FAME-2 India scheme was redesigned in June 2021 based on experiences during the Covid-19 pandemic period and feedback from industry and users. The redesigned scheme intends to enable the faster proliferation of EVs by lowering upfront costs. The scheme has been extended by a period of two years – that is, up to March 31, 2024.

Deployment of FAME-2 incentives

According to government data, as of October 2022, there were 64 electric vehicle manufacturers registered to access demand incentives under FAME-India Scheme Phase-II.

The details of demand incentives given under Faster Adoption and Manufacturing of (Hybrid and) Electric Vehicles in India (FAME) scheme phase-II, category-wise are shown below:

Parliamentary Questions, Rajya Sabha, December 9, 2022.

See here for the total number of EVs registered in the country, category-wise, as on November 30, 2022.

PLI programs and other measures to support the EV industry in India

• The National Programme on Advanced Chemistry Cell (ACC):
  The PLI scheme for ACC battery manufacturing has an outlay of INR 181 billion (US$2.49 billion). The goal is to establish local manufacturing capacity of 50 Giga Watt Hour (GWh) of ACC and five GWh of Niche ACC capacity. The program is designed to be technology agnostic. Beneficiary firms can choose suitable advanced technology and their corresponding plant and machinery, raw material, and other intermediate goods to set up their cell manufacturing facility to cater to any application.
  The NPACC PLI scheme will thus aid local capacity building in core competent technologies to make India a hub of clean energy and boost local employment.
  PLI beneficiaries announced under this scheme are Reliance New Energy Solar Limited, Ola Electric Mobility Private Limited, Hyundai Global Motors Company Limited, and Rajesh Exports Limited. Five other applicants have been placed on a waitlist, including Exide Industries Limited and Larsen & Toubro Limited.
  Under this scheme, beneficiary firms are required to achieve a minimum of 25 percent domestic value addition (DVA) by the end of the second year and 60 percent by the end of fifth year of the scheme.

• Productivity Linked Incentive (PLI) scheme for Automobile and Auto Components:
  Announced with a budgetary outlay of INR 259.38 billion (US$3.50 billion), the primary goal of this scheme is to boost clean energy production capabilities, such as through the electric vehicle industry in India, and expanding the country’s share in the global automotive trade. The credit ratings agency ICRA expects the PLI to accelerate investments towards developing a local EV ecosystem and potentially make India an export hub in the global auto supply chain. 20 companies have been approved as PLI beneficiaries under the “Champion OEM Incentive Scheme”, including Ford, Hyundai, Kia, Ashok Leyland, Piaggio, Hero MotoCorp, Suzuki Motor, Tata Motors, and Bajaj. 75 companies have secured PLI approval under the “Component Champion Incentive Scheme”, including Maruti Suzuki, Hero MotoCorp, Tata Autocomp, Mitsubishi Electric, Toyota Kirloskar, Motherson Sumi, Bosch, and Lucas-TVS.
  The approved applicants proposed investments worth INR 450.16 billion (US$5.88 billion) under the Champion OEM Incentive Scheme and INR 298.34 billion (US$3.90 billion) under the Component Champion Incentive Scheme.
  Under this PLI scheme, a minimum 50 percent DVA will be required to get the incentive.
• GST reductions and expanding charging infrastructure:
  Goods and services tax (GST) rate cuts and road tax waivers have been announced by central and state governments, in addition to state-level subsidies and direct investments in electrifying fleets and setting up charging infrastructure.
  The GST on EVs has been reduced from 12 percent to 5 percent; GST on chargers/ charging stations for EVs has been reduced from 18 percent to 5 percent.
• Fee exemptions:
  The Ministry of Road Transport & Highways (MoRTH) has asked battery-operated vehicles to be given green license plates and be exempt from permit requirements. MoRTH has also advised states to waive road tax on EVs to reduce initial costs.
  For example, Uttar Pradesh just announced 100 percent road tax and registration fee exemption for EV owners. This exemption will be valid on the purchase and registration of electric vehicles for a period of up to three years since the notification of the Uttar Pradesh Electric Vehicle Manufacturing and Mobility policy [announced October 2022]. The exemption will be valid for a period of five years on the purchase of EVs that are produced in UP itself.

• Scheme on Enhancement of Competitiveness in the Indian Capital Goods Sector-Phase-2:
  On January 25, 2022, the Ministry of Heavy Industries (MHI) notified the Scheme on Enhancement of Competitiveness in the Indian Capital Goods Sector-Phase-2 for providing assistance to Common Technology Development and Services Infrastructure. The scheme has a financial outlay of INR 12.07 billion (US$148.44 million) with budgetary support of INR 9.75 billion (US$119.90 million) and industry contribution of INR 2.32 billion (US$28.53 million).
  A total of 28 projects with a Project Cost of INR 9.09 billion (US$111.85 million) have been approved so far under the Phase-2 of the Scheme for Enhancement of Competitiveness in the Indian Capital Goods Sector.
  There are six components under the Scheme for Enhancement of Capital Goods Sector Phase-2, namely:
  – Identification of Technologies through Technology Innovation Portals;
  – Setting up of four New Advanced Centres of Excellence and augmentation of Existing Centres of Excellence;
  – Promotion of skilling in Capital Goods Sector–creation of Qualification packages for skill levels 6 and above;
  – Setting up of four Common Engineering Facility Centres (CEFCs) and augmentation of existing CEFCs;
  – Augmentation of Existing Testing and Certification Centres; and
  – Setting up of 10 Industry Accelerators for Technology Development.

This article was originally published January 19, 2023. It was last updated March 7, 2023.

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