A long haul ahead

Source: By Surajit Mitra: The Financial Express

The government recently notified the second phase of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India (FAME-2) scheme (in effect from April 1 for three years). It envisages incentives for purchase of electric buses, PVs and three-wheelers for commercial usage, along with privately-owned electric two-wheelers. Around 85% of the Rs 10,000 crore outlays are earmarked for incentives, while Rs 1,000 crore will be used for creating charging infrastructure.

FAME-2 proposes that the quantum of incentives be linked to the cost of advance batteries (non-lead acid batteries) and the government will be neutral to all types of EV technologies—hybrid electric vehicles (HEV), plug-in hybrids (PHEV) and battery electric vehicles (BEV). The contours of FAME-2 are influenced by the learnings from the pilot FAME-1 (April 1, 2015, to March 31 this year). So, stringent eligibility conditions relating to localisation as well as better vehicle performance specifications such as minimum top speed, range per charge, acceleration, energy efficiency of EVs, etc, have been included.

Many companies have raised concerns about eligibility conditions being too stiff and are demanding for their review, as also for allowing them in time to conform to these criteria. Broadly, however, most scheme conditions are on expected lines. For instance, the precondition of subsidies in case of cars being provided only for commercial applications (taxi/fleet) and the insistence on localisation reflects political and economic realities. While there may be no problem for the government in levying lower GST of 12% and lower road taxes for all EVs, private or commercial, yet it is politically inconceivable to provide subsidies for purchase of cars to well-off citizens irrespective of environmental benefits.

Similarly, as currently most EV parts are imported, a move towards electric mobility threatens to shift manufacturing and value-addition abroad. Hence, it is logical that unless the government takes corrective policy measures, the auto sector, which accounts for half of India’s manufacturing GDP, may go the way of the electronics industry, where huge imports have become a big problem.

At the same time, policymakers cannot ignore the ground realities. While the growth outlook for auto sector is positive, the consumer acceptance of EVs in India remains challenging. Indian consumers demand highest performance levels at lowest prices, and Indian driving conditions are tough due to high temperatures, slow average speeds, etc. Also, local manufacturing of batteries and parts, which constitute the bulk of the cost in an EV, will need time and substantial investment. While FAME-2 is important for supporting EV offtake, this push will only be for a limited time and volumes. Localisation will not take place merely by creating initial demand through FAME-2 or by stipulating stiff localisation timeline targets.

So, in addition to setting up charging infrastructure, we need policies for attracting investors to manufacture EV parts in the country. While supply-side incentives are essential, these alone will not be enough, because the break-even period for auto sector investments is long (8-10 years), and it involves high risk due to a volatile, uncertain, complex and ambiguous future scenario. Perhaps an effective policy intervention is to have a preferential taxation regime, both GST and road tax, for all EV technologies. Currently, only BEVs enjoy a significantly lower taxation as compared to petrol/diesel vehicles. This benefit should be extended to HEVs and PHEVs in proportion to the social benefit provided by way of reduction in fossil fuel consumption and carbon emissions.

The most important gain from such a policy will be to ensure long-term sustained minimum volume demand for EV parts since all these technologies have common parts. This will help meet the prerequisite condition for investment viability and make localisation feasible. For this, the government must carry forward its technology-agnostic intent, as evident in FAME-2, by rationalising GST tax rates for HEVs and PHEVs. As a long-term policy, vehicle taxation must be based on fuel efficiency as measured by carbon emissions. This parameter simultaneously addresses all the priorities, besides being simple, measurable, transparent and outcome-based. Clearly, it’s going to be a long haul for FAME-2, which needs consistent, sustained policy backup to succeed.