FAME-II revisions spark hopes for a jump in electric two-wheeler sales in India

On June 11, 2021, India’s Department of Heavy Industries made some very encouraging modifications to the FAME-II scheme. Purchase incentives for electric two-wheelers (E2W) were increased by 50% to INR 15,000 per kWh of battery capacity. The limit on this incentive was also relaxed from 20% of the ex-showroom price to 40% of the ex-showroom price. As high upfront costs are the major barrier for E2W adoption in India, it’s no wonder the industry is rejoicing.

What do these revised incentives mean for E2W cost parity with conventional models? As an example, let’s look at the impact on mid-range E2Ws, those in the 125–150 km real-world range. The model from our new paper indicates that in the ambitious electrification scenario considered, wherein 100% of new two-wheeler sales are electric by 2035, without any incentive support, upfront cost parity isn’t expected until 2035. And in the case of high-performance models, upfront cost parity doesn’t come until later, well after 2040. When we additionally considered the earlier FAME-II incentive structure of INR 10,000/kWh capped at 20% of ex-showroom price along with the 23% preferential Goods and Services Tax (GST) advantage, we found this timeline shifts forward to the 2026–2030 time frame. Further adding on the FAME-II outlay just announced shifts this to 2022–2025. So, the new FAME-II revisions can be considered to offer a 4- or 5-year advantage in upfront cost parity over the earlier incentive structure.

If we additionally layer state-level direct incentives like purchase and scrapping incentives such as those offered by Delhi, upfront cost parity for mid-range E2Ws is achieved by next year (Figure 1).

Figure 1. Impact of incentives on upfront cost-parity for mid-range electric motorcycles.

Following the FAME-II subsidy revision announcement, manufacturers were also quick to announce retail price cuts for the shorter-range models that currently dominate the market. For example, the RV400 motorcycle, with a city driving range near 100 km and 3 kW of motor power, is now cheaper by INR 12,000 and retails at INR 1.07 lakhs. While our analyses here assume the full benefit is passed on to consumers, this price-cut appears to be slightly lower than the full benefit from the revised subsidy structure, based on the RV400’s battery pack. We find that with the preferential GST and the revised FAME-II benefit, the RV400 can be expected to reach upfront cost-parity (ex-showroom) with a top-selling conventional motorcycle like the Hero Splendor Plus by 2024. Likewise, the Ather 450X scooter with a city driving range near 85 km and 6kW of motor power, is now cheaper by INR 14,500 and retails near INR 1.44 lakhs. With the revised subsidy rates, this scooter can reach upfront cost parity with a top-selling conventional scooter like the Honda Activa by 2026. State-level incentives such as from Delhi and as just announced by Gujarat sweeten the deal further and can bring forward cost-parity by another year or two.

Although battery costs are falling fast globally, cost reduction curves for India will follow a time-lag from global prices based on how fast (or how slow!) domestic battery manufacturing scales up. In the aforementioned production linked scenario wherein 100% of new sales are E2W by 2035, our model indicates this time lag to be about 4 years from leading markets. So, scaling up fast matters. Further, our model brings to light that even under such an ambitious production scenario, without key incentives, upfront cost parity would be a decade or more away, even for some short-range models. That’s completely misaligned with India’s environmental and climate policy objectives. So, incentives matter a lot, too.

The latest revised incentives also make an already attractive TCO proposition even more alluring for consumers. Going back to the mid-range example, both 5-year and 10-year TCO parity was already achieved before the additional FAME-II incentives. The additional incentives combined with state-level incentives, which include direct incentives and a full road tax-waiver, make for a very compelling case by lowering E2W TCO below conventional models (Figure 2).

Figure 2. Impact of incentives on TCO cost-parity for mid-range electric motorcycles.

Additional supply-side incentives to boost battery production in India have been announced under several state-level policies and the central government’s Production Linked Incentive (PLI) scheme. We plan to analyze the impact of supply-side incentives on cost-parity in the future, so watch out for a separate blog on that. Along with demand and supply-side incentives, timebound targets to switch to 100% electric for new sales can support investor assurance and big leaps in domestic production.

Along with our morale, the COVID-19 pandemic has taken a toll on the auto industry, including E2W sales in India. The FAME-II revisions are a welcome stimulus and they’re aligned with pandemic recovery measures from other governments that give markets a bigger push toward electrification. With excitement being expressed from all corners of the industry in India, let’s hope that E2W sales in the subsequent years speak the loudest!

Electrification Zero-emission vehicles