These days, journalists covering the Indian automotive industry find their inboxes full of anonymous ‘whistle-blower’ emails. It’s difficult to verify the veracity of most of these emails and the ‘complaints’ they carry but almost all involve issues around electric two-wheelers and the second phase of the government’s FAME — Faster Adoption and Manufacturing of Electric Vehicles — subsidy scheme.
The FAME Phase-II subsidies were doled out to various manufacturers between 2019 and 2022. And in the past couple of days, two of those notable manufacturers—Hero Electric and Okinawa Autotech—have been served notices by the Ministry of Heavy Industries (MHI) for the recovery of Rs 249 crore in subsidies. Both the companies allegedly failed to comply with the guidelines of Phased Manufacturing Programme (PMP) that called for localised manufacturing.
After investigations, it was found that Hero and Okinawa made rampant use of imported parts in place of local parts in the manufacturing of electric automobiles approved under FAME-II scheme.
Other manufacturers in the industry are also caught up in the case. Market leader in electric two-wheelers, Ola Electric has agreed to reimburse Rs 130 crore to customers who bought the Ola S1 Pro with an off-board charger between 1 April 2019 and 30 March 2023.
Ather Energy has removed the fast-charger as an accessory and revised the prices of their products to be eligible for the scheme.
Sohinder Gill, CEO of Hero Electric, released a strong statement to the media claiming that a resolution was in sight and that the compliance issues are being brought up to topple ‘market leaders’.
It is true that until 2022, Hero Electric and Okinawa did lead the electric two-wheeler market. However, sales figures for April 2023 from the Ministry of Road Transport and Highways’s VAHAN portal show that both companies sold 3,287 and 3,217 units respectively while Ola Electric sold 21,573 units.
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FAME subsidy, Covid impact
So, what went wrong? Why is the entire electric vehicle industry, particularly two-wheelers and three-wheelers, under a cloud? It depends on who you believe. Gill’s point is that Covid disrupted the entire value chain and manufacturing of critical components could not move to India in the way the government had envisioned in the PMP. He also claims that late-comers like Ola, Ather, Bajaj Chetak and TVS have benefited from a newly burgeoning ecosystem of domestic manufacturers making controllers and motors after the likes of Hero Electric birthed the market. But his main point is that a shortfall of “5 or 7 or 10 per cent (localisation value) in the final product should not be read as a wilful default, but a logistical crunch.”
According to Gill, over Rs 500 crore in FAME-II subsidies owed to manufacturers is stuck due to the ongoing investigations. “We passed on the subsidies to our customers and continued to do so even when the government was doing this investigation quietly. This has adversely impacted our cash-flow situation,” the CEO of a company manufacturing three-wheeler electric vehicles said.
But he admits that there were certain manufacturers who took advantage of the scheme to claim subsidies without making investments in local manufacturing. But others claim that all the subsidies and what manufacturers were doing with it were signed off at the government level. “Sure, investigate the manufacturers but the government has to also investigate internally,” says an advisor to some smaller manufacturers.
The issue is that the well-intentioned FAME subsidy has always been open to misinterpretation and misuse. When the scheme included hybrid vehicles, Maruti-Suzuki claimed the subsidy on their ‘mild hybrid’ version of Ciaz sedan. It’s a type of car in which a slightly larger battery coupled with an Integrated Starter Generator (IGS) system allows the engine to stop in idle situations such as at the traffic light. It is a fairly common feature on vehicles today. A true hybrid like Honda City e:HEV 2023 uses two sources of energy, petrol or diesel engine with electric motor.
The misappropriation played a major role in the government falling out of love with hybrid technology. It is a pity given that hybrids are far cheaper than full electrics — they do not have range issues, they deliver fantastic fuel economy and they achieve carbon reduction.
The FAME Phase-II subsidy was meant to help the electric vehicle industry get on its feet. The subsidies on an Ola S1 and Ather 450X, two of the most popular electric two-wheelers, make their purchase cost upto Rs 15,000 cheaper (as different states also provide additional subsidies) and in the price bracket of a Honda Activa scooter. The Honda Activa scooter still sells an average over 150,000 units monthly, which is double that of the entire electric two-wheeler market. At current electricity and petrol prices, the operating expenditure of a 125cc petrol scooter like the Activa is without a doubt 10 times or more than that of a similar electric scooter.
Without the subsidies, the cost differential between an electric scooter—without a home charging system—and a petrol 125cc scooter will be in excess of Rs 25,000. The impact of the subsidy is potentially less on medium or low power electric scooters made by Hero Electric and Okinawa, the types you see being zipped around by food and grocery delivery agents, whose daily usage might still justify an electric vehicle. But for a private buyer, such a price difference might put them off an electric two-wheeler.
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The baby and the bathwater
But subsidies are not and should not be a long-term solution. The fantastic operating economics of electric vehicles should stand up for themselves. Whether they are cars like the MG Comet or an electric scooter. Financing of electric vehicles is becoming easier with more financial institutions entering the space as environmental, social and governance (ESG) frameworks are introduced in the corporate world. But such institutions and investors in companies producing electric vehicles will be wary of ongoing government investigations.
There is no doubt that there were major problems in doling out the FAME Phase-II subsidy, and that requires full investigation. It might emerge that those who formulated the policy were being unduly aggressive, and yes, the Covid shutdown did impact India’s industrial capacity. This is still a sunrise sector where we are learning, but we should not throw the baby out with the bathwater.
Just look across the mountains at our eastern neighbour and the focussed industrial policy that has led China to become the global leader in the electric car space. It took an interaction with Kartik Hajela, co-founder and Chief Operating Officer of Log9 Materials, India’s first Lithium-IOn battery maker, about whom I wrote a few days ago, to put the potential into perspective, “We are the global leader in internal-combustion engine two-wheelers and we can do the same thing with electric two-wheelers.”
@kushanmitra is an automotive journalist based in New Delhi. Views are personal.
(Edited by Ratan Priya)