With increasing interest rates, the overall cost of ownership is likely to increase further for an EV consumer. This could delay the pace of growth of EV penetration in India especially in the short term.
02 Jun 2023 | 5249 Views | By Autocar Pro News Desk
India Ratings and Research is of the opinion that the reduction of subsidy under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME)-II scheme on electric two-wheelers (e-2Ws) could slow down the pace of electric penetration in the 2W market in India in FY24. The subsidy reduction could ...
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India Ratings and Research is of the opinion that the reduction of subsidy under the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME)-II scheme on electric two-wheelers (e-2Ws) could slow down the pace of electric penetration in the 2W market in India in FY24. The subsidy reduction could lead to e-2W prices increasing by 20%-30%, thus increasing the payback period for consumers.
However, given the significantly lower operating cost of an e-2W along with increasing fuel prices of ICE (internal combustion engine) vehicles, the electric penetration is likely to continue in the medium to long term.
The Ministry of Heavy Industries, announced on May 21, 2023, that it would amend the subsidy available per vehicle (e-2W) under FAME-II scheme to Rs 10,000 per kWh from Rs 15,000 per kWh, while also capping the maximum subsidy at 15% of the ex-factory price against 40% earlier. The E-2W original equipment manufacturers (OEMs) have already announced price hikes starting 1 June 2023, in the price range of Rs 10,000 to Rs 35,000, while further price hikes are likely in the next few months to pass on the full impact. E-2W OEMs have also increased the pricing over the past few months to pass on the cost increase on account of the implementation of battery safety norms.
The FAME-II subsidies were initially announced in 2019; however, the e-2W industry (particularly scooters) saw faster electric penetration since subsidies were increased in June 2021, which brought down the upfront cost. The segment also saw a higher influx of new OEMs, thus increasing the number of models available in the market, at various price points, solving range anxiety as well as establishing consumer acceptability for e-2Ws. However, the industry has already exhausted the allocated funds under FAME-II scheme towards e-2Ws, and has already reached sales of close to 1 million vehicles. The subsidy reduction could also discourage newer players from entering the market.
Compared to ICE vehicles, the upfront price of an e-scooter was around 1.1x - 1.7x before 1 June 2023. The subsidy reduction could increase this ratio to 1.4x to 2.2x. Moreover, with increasing interest rates, the overall cost of ownership is likely to increase further for an EV consumer. This could delay the pace of growth of EV penetration in India especially in the short term. While the pay-back period is likely to increase, the significantly lower operating cost would still favour the purchase of EVs in the long term and hence, the electric penetration in 2Ws is likely to continue.
These OEMs are still operating at EBITDA level losses or bleak profitability. Moreover, the industry is already grappling with delays in subsidy disbursal by the Ministry on account of investigations around violations of the phased manufacturing plan. As per industry reports, Rs 14 billion – Rs 16 billion of subsidy receivables are stuck, thus increasing the working capital requirements of the industry. While India Ratings believes that most OEMs would pass on the price increase on account of the subsidy reduction, the intense competition prevailing in the industry could make the companies look at a more gradual price increase while absorbing some cost in the interim. This would widen the losses of e-2W EMs and stress their balance sheet further.
The e-2W industry is still evolving with significantly lower electric penetration, and EV OEMs could also look at bringing in cost and production efficiencies by standardising battery sizes and other such measures. The industry could look at business models such as battery swapping to bring down the upfront cost and leasing of vehicles, especially for B2B usage.
The industry could also see the consolidation of players. India Ratings continues to believe that given the lower operating cost, continued economic feasibility on the total cost of ownership basis, and evolving models, electric penetration in 2Ws, especially scooters, is likely to continue in the medium to long term.