Daybreak - The FAME subsidy is working just fine for India's EV sector

Episode Date: March 17, 2023

A few months ago, a whistleblower alleged that some of the top EV makers in India were misusing the FAME subsidy. The government began an investigation and withheld the subsidy for multiple EV manufacturers.Ever since, news stories have been reporting how the sale of EVs in India has declining and the FAME subsidy is under the spotlight for all the wrong reasons.But the government is only trying to correct a past mistake. The impact of the subsidy on the rising penetration of EVs in the country can't be ignored. In fact, the criticism of FAME could actually end up hurting the EV sector in the long run.Tune in. 

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the same. secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they managed to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into.

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Quite a bit of drama going on lately in the world of electric vehicles or EVs in India. But before I get to the drama bit, let me give you some context. It was back in 2011 when the Indian government launched a scheme that many of you might be familiar with. It is called fame and it's tax. for faster adoption and manufacturing of electric vehicles.

It was a part of the national mission for electric mobility. The idea was to encourage the adoption of electric and hybrid vehicles in the country so we could cut down on our dependence on fossil fuels, reduce air pollution and mitigate the impact of climate change. The scheme essentially gives incentives to manufacturers and buyers of electric and hybrid vehicles. make EVs more affordable and accessible to push demand. Ever since its launch, Fame has been revised multiple times and the latest one is called Fame 2. It was introduced in 2021 with a budget of 10,000 crore rupees to support the production of more EVs in India.

Under this version, companies can offer a discount of up to 40% on the cost of locally manufactured vehicles and claim it as a from the government. The key word here is locally manufactured and you'll know why in a bit. So when Fame 2 was launched, EV manufacturers in India welcomed it with open arms. Not long after it was announced, Ather Energy, one of India's most well-known EV manufacturers slashed the prices of its models by more than $14,000. Aether's CEO, Tarun Mehta, called Fame 2 a phenomenal move and said that it will boost sales. and that they expect to sell 6 million units by 2025.

Hero Electric's MD Navine Munjal said that it would prove to be the most significant move of the decade and it would help the growth of EVs and help transform the sector into a cleaner and greener mode of transport. And now fast forward to 2023 and EVE makers are on the verge of taking the government to court. How did that even happen? Well, around a few months ago, the government began investigating around a dozen electric two vehicle makers after they were accused of misusing the subsidy. Remember the keyword I told you earlier? Locally manufactured? Turns out, according to these allegations, some EV makers had been using imported components mostly from China and claiming everything is locally sourced just to claim these subsidies.

Seema Singh, the editor and co-founder of The Ken, wrote about this unfolding drama in a recent edition of her newsletter, Green Margins. And she says, all in all, this is turning out to be a PR nightmare for the center. But really, think about it. What is wrong if the government is trying to correct an earlier mistake? Welcome to Daybreak, a business podcast from The Ken. I'm your host, Nakeda Sharma, and I Don't Chase the News Cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time.

Today is Friday, the 18th of March. Ever since these allegations came to light against EV makers and the government started investigating them, news articles have been saying that the sale of EVs in India has slowed down. Now, there was something interesting about these articles that Sima noticed. In most of them, the person quoted was Sohinder Gill, the CEO of EV-Maker Hero Electric. He also happens to be the Director General of the Society of Manufacturers of Electric Vehicles. But here is the thing. EV is a sunrise sector.

Seema has been covering it for a while and she says that it is quite surprising that the EV industry association does not have an independent office bearer. Nevertheless, in most of these news articles, Gill has been saying that if the current rate of slowdown in EV sales continues, which was actually visible in December and January, the government will miss its target of supporting 1 million electric two-wheeler's by the end of this financial year, which ends on March 31st. News articles also reported that the government, in response to the alleged misuse of fame, stopped the subsidies of around 17 companies totaling €1,100 crore rupees so far. The affected companies include Hero Electric. And the government also recently sent notices to some companies like Aether Energy and Ola Electric. This was for separately invoicing the charger and software that they sell with their two-wheelers. because the government had actually set a 1.5 lakh rupees price cap on the retail price of vehicles

for availing these subsidies. Now, if you remember, some of these companies that I just mentioned were among the first to hail the latest version of fame when it was launched as phenomenal. So how did it get to a point where some of these very EV makers are considering challenging the government's decision to stop the subsidies in court? Stay tuned to find out. A year ago in April, someone called Akash Sharma sent some emails to authorities. He claimed that some leading EV-2-wheeler manufacturers were not complying with the domestic value-ad requirements

that were necessary to be eligible for India's EV subsidy program. This group of manufacturers who were allegedly gaming the system by importing Chinese components and claiming localisation benefits included leading companies such as Hero Electric, Okinawa and many other EV makers. The first who in fact accounted for around half of India's EV2 wheeler market at that point. The email showed that the whistleblower had actually done his homework. He had added data from the company's annual reports and import lists to show that these manufacturers were in fact relying heavily on imports to build their products. Many more emails from the whistleblower followed with more allegations.

They claimed that there were a bunch of other manufacturers who, while complying with localization requirements, were still gaming the system. They were doing this by keeping their prices artificially low. OEMs or original equipment manufacturers such as TBS Motor, Aether Energy and OLA Electric were allegedly selling chargers and software updates as accessories to keep the prices of their EV two-wheeler's below 1.5 lakh rupees in order to avail the subsidy. But these OEMs dismissed these allegations. They pointed out that their websites had displayed their pricing all along

and that the authorities had always known about how they priced their products. A veteran two-wheeler expert told Seema that up until the Whistleblowers Act, this gaming of the system, was actually a transparent fraud. He said that it was something that the government had chosen to ignore for a few years. Because in the early days, when no one had any EVs to sell in the Indian market, a Chinese-made Indian EVE did not really hurt anyone. But once the government decided to put in serious money into the fame subsidy, it cracked the whip on the make-in-India aspect of these vehicles.

And this is where Sima makes a very interesting point. I will tell you about it in the next segment. There is no doubt that these allegations against EV makers and subsequent investigation and action by the government has hurt some companies. It has also affected the overall sale of electric two-wheeler's. After an all-time high in November last year, new EV registrations fell by over 14% in December and more than 15% in January. This is according to the government's Wahan website. But at the same time, these massive subsidies, have also helped increase the penetration of EVs around the country.

An EVE executive told us that before late 2021, when the Fame 2 subsidy really took off, EVE scooter penetration was less than 2% in India. Now, it is 16 to 18%. That is a decent increase within a span of less than 2 years, right? And that is essentially Sima's argument. She says, what is wrong with the government correcting an early? mistake. And in the process, so what if it narrowly misses a near-term target to build capacity

in the medium term? In all fairness, so far, the fame subsidy seems to be working just fine. And stretching these complaints against it for too long and plugging stories in newspapers that the EV sector is hurting is actually a disservice to the sector. Daybreak is produced from the Newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited

by my colleague Rajiv Sien.