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Decoding the effect of subsidy cuts on the EV market

Decoding the effect of subsidy cuts on the EV market
Reading Time: 3 minutes

The Indian government has recently announced a major cut to subsidies for electric vehicles (EVs). The maximum subsidy rate has been slashed from 40% to 15%, and there are now stricter localisation norms in place.

This is a significant change, and it will have a major impact on the EV market in India. Here’s what you need to know about the subsidy cut and its implications.

Why were EVs subsidised in the first place?

The government-subsidised EVs to encourage their adoption and reduce India’s dependence on fossil fuels. EVs are more environmentally friendly than gasoline or diesel vehicles, and they also produce zero emissions.

The subsidy was also seen as a way to boost the domestic EV manufacturing industry. India has a lot of potential to be a major player in the global EV market, but it needs to develop a strong domestic manufacturing base first.

Under the FAME scheme, the government provided an upfront reduction on the purchase price of electric two-wheelers to encourage their adoption. Till Dec ‘22, the subsidy benefit was availed on over 7.43 lakhs of electric vehicles, boosting EV sales in India. 

The policy shifts

In May 2023, the government slashed the maximum subsidy rate from 40% to 15%. The major reason cited by the government was that some manufacturers were claiming subsidies for even though they haven’t met the requirement of using at least 50% locally sourced components. In other words, they might be falsely claiming that their vehicles meet the localisation norms to benefit from the subsidies, while in reality, they are using a higher proportion of imported components.

What’s the impact of the subsidy cut?

On consumers: The subsidy cut will make EVs more expensive for consumers. Prices may surge by 15-18%, which will make them less affordable for some people. This could be two-wheeler EVs in India.

On manufacturers: The government has issued penalties worth ₹500 Cr to manufacturers like Hero Electric, Benling Motors, Ammo Mobility, etc. These companies have expressed concerns about their financial stability and may also consider passing on penalties to the customers, leading to refunds of excess subsidies given.

What lies ahead for the EV market in India?

Only time will tell what the long-term impact of the subsidy cut will be. But one thing is for sure: some two-wheeler EV companies may be headed towards radical changes. With subsidies ending, some of them may find it tough to compete. Manufacturers with enough capital may absorb the subsidy loss without increasing the prices of their vehicles, while smaller players may consider consolidating with larger ones. As a result, only a few large companies may dominate the market in the future as compared to over 25 players today. 

There are still a number of factors that could drive the growth of the EV market in India, including rising fuel prices, government policies, and technological advancements. If these factors play out favourably, the EV market in India may grow rapidly in the coming years.

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Decoding the effect of subsidy cuts on the EV market
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