EV Subsidy Cuts Could Lead To Price Rise: Could This Impact Demand For Electric Two-Wheelers?

May 2023 was a momentous month for electric vehicles in India. EV sales crossed 1,50,000 units in a month for the first time ever, hitting 1,57,338 units. Of these, 1,04,829 units sold were electric two-wheelers, dramatically surpassing the 66,725 electric two-wheelers sold in April 2023.

One of the key drivers behind the sharp rise was the May 21 announcement by the Ministry of Heavy Industries amending the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles or FAME-II scheme to significantly slash subsidies for fast-speed electric two-wheelers (E2W). According to the new amendments, which went into effect on June 1, 2023, subsidy allocation for E2W was reduced for both, demand incentive (down to 15% of ex-factory price from the earlier 40%) and incentive per kWh of battery size (Rs 10,000 per kWh from the previous Rs 15,000 per kWh).

With major original equipment manufacturers (OEMs) expected to, at least in part, pass on the subsidy loss to consumers, prices of several two-wheeler models were expected to rise anywhere between Rs 10,000- Rs 40,000. This led to a rush to buy EV two-wheelers before the June 1 deadline.

Ganesh Kapasi, who runs authorized dealerships with Okinawa, Benling and BGauss in Mumbai, told The Core that after a two-month slump, they sold 50 units in five days, in the last week of May after the news of the subsidy slashes got out. Ather Energy even took to Twitter to urge customers to buy the flagship Ather 450X before the deadline.

Demand May Slump

Come June 1, several OEMs announced price hikes – Ola Electric announced a hike of roughly Rs 10,000 - Rs 15,000 for its S1 pro model, Ather Energy hiked up the prices of 450X by about Rs 30,000, TVS Motor company announced that TVS iQube‘s price increase would be in the range of Rs 17,000 – Rs 22,000 and Ampere by Greaves Cotton models saw prices rise by Rs 21,000 - Rs 39,000. Meanwhile, Hero Electric and Okinawa Autotech have announced that they won't be raising prices.

Kamraj K Pillai, General Manager of Hero Electric's Worli showroom - Autonex Ventures Llp, told The Core that their walk-ins have doubled since May 31st. "Until the last two months, we were getting nearly 5 walk-ins per day, the average is 8-10 per day now," he said, adding that the branch expects sales to rise in June. "The impact has been positive for us," he said.

For the industry as a whole, however, demand is expected to dip in the coming few months. "We will see some pressure on numbers over the next three months and the customer will take some time to adjust to it," Hemal Thakkar, Director, Consulting at CRISIL Market Intelligence and Analytics told The Core.

The revised subsidy would mean an increase in upfront cost for the consumer, of roughly Rs 20,000, as per CRISIL research. This would mean, for instance, an increase of Rs 4,000 in the down payment and Rs 16,000 added to EMI over three years for a consumer, Thakkar explained. With this, the upfront price of electric two-wheelers would rise quite a bit compared to internal combustion engine (ICE) vehicles.

(Note: The price changes listed here are indicative and may vary depending on state and city.)

The amount of time it would take for the savings from owning and operating an EV two-wheeler to offset the upfront cost for a consumer has risen to 5 years, as per a May 2023 report by ICRA. The pay-back period had dropped to 3 years after the June 2021 amendments to FAME-II guidelines, when demand incentives were raised from 20% to 40%.

Earlier estimates predicted that electric two-wheelers would make up 13-15% of the total vehicle market by FY2025, and penetration is now estimated to dip to 10-12% as per the report. However, the estimates for FY2030 remain unchanged, it said.

"We could see some pressure for the current year where maybe the electrification rate that we (CRISIL) had given in the range of 7-8% could probably start looking like 6-7%", said Thakkar.

Not All Bad News

"But from a long term perspective, if you ask me, we will not be akin to changing our forecast," Thakkar further told The Core. A CRISIL report from March 2022, charting the EV trajectory beyond the FAME regime, predicted penetration of electric two-wheelers to reach 10-15% by FY2026 and 37-42% by FY2031.

One of the reasons that industry experts don't feel like a long-term slump is incoming is that the Total Cost of Ownership (TCO) of electric two-wheelers continues to remain lower than that of ICE two-wheelers.

Another reason is a rising wave of potential EV consumers, especially in urban areas. Thakkar points to how the EV adoption rate in cities like Mumbai, Delhi, Bangalore and Hyderabad, due in part to a "herd mentality" as well as environmental consciousness.

Photo: Jessica Jani

Electric two-wheeler dealers The Core spoke to in Mumbai also pointed to how price wasn't the only thing driving EV consumption in the city. Sachin Bhutta, who runs Reyansh Riders, an authorised dealership of Joy E Bikes in the city, said that there are three types of consumers he encounters – "about 90% are price conscious or they know someone who bought an EV, 8-9% are buying because they want to try what's new, and 0.5% are environmentally conscious". Kapasi of SRK e-ventures adds that people are keen on adapting to EVs. "Basically if I say a family has four scooters, yes, they would like to have one or two EVs in that," he said.

Need For Long-Term Policy

Industry leaders have more or less welcomed the amendments, with many wanting to move towards subsidy-free manufacturing. "The lowering of subsidy has come a bit faster than anticipated," Ravneet S. Phokela, Chief Business Officer, Ather Energy, told The Core. "While it's a short-term financial hit, it's a step in the right direction…This change is a great opportunity for OEMs to also re-look at consumer pricing and bring it closer to what it would eventually be in a post-subsidy world."

Meanwhile, the Society of Manufacturers of Electric Vehicles (SMEV), which had earlier in May cautioned that the sudden subsidy reduction would lead to a major decline in EV adoption, has asked the government to create a Rs 3,000 crore fund for OEMs badly affected by the subsidy blocks.

One of the reasons attributed for the sudden amendments is that the government had nearly exhausted the funds allocated for EV two-wheelers under FAME-II. The government had a target of supporting 10 lakh electric two-wheelers under the FAME-II subsidy by March 2024.

In FY 2022-23 itself, the total number of electric two-wheelers sold was over 7 lakh. Had the target been capped, there would be no central subsidy at all. That would've added about Rs 45,000 to the price of the consumer, way higher than the average Rs 20,000 being added with the current reduction.

However, Thakkar pointed out the lack of clarity for the road ahead and the need for a long-term policy roadmap. "With the kind of engineering prowess that India has, the kind of software prowess that we as a country have, there is no reason why we couldn't be the global champions for electric two-wheelers," he said.

"We can definitely be one of the key countries which produces and exports electric two wheelers provided there is absolute long-term clarity in terms of policy."