Since 2015, the Indian government has actively championed the adoption of electric vehicles (EVs) through a series of strategic initiatives, including FAME, FAME II, EMPS, and the recent PM E-DRIVE. These programmes aim to stimulate demand, while the Production-Linked Incentive (PLI) scheme incentivises the supply of automobiles and batteries. This comprehensive approach underscores the government’s commitment to fostering a robust EV ecosystem, evident in the various incentive policies tailored to different vehicle categories and their positive impact on market dynamics.

The data indicates an evolution of EV policy push and incentive support structures over time. The latest PM E-DRIVE demonstrates a diverse focus and different targets compared to the earlier FAME II scheme. The current scheme prioritises the support for E-bus adoption, with a target of 14,028 buses and a total outlay of INR 4,391 crore, which constitutes 40% of the total outlay of INR 10,900 crore over the next two years.  With these targets PM E-DRIVE aims at a substantial uptake of E-buses, up from the 3,600 sold in FY24, and over 7,600 sold during the entire 5-year duration of the FAME II scheme.

Table: PM E-DRIVE Scheme snapshot, incentives, and targets 

In addition, the cabinet has approved a Payment Security Mechanism (PSM) for buses, with a budget of INR 3,435.33 crore. This scheme aims to support the adoption of 38,000 E-buses between FY25 and FY29 and like PM E-DRIVE will also be managed by the Ministry of Heavy Industries (MHI). The PSM targets public transport authorities (PTA) adopting E-buses under the Gross Cost Contract (GCC) model. The scheme will provide liquidity support equivalent to the leasing obligations of 3 to 4 months to the bus providers under the GCC. The PSM is designed to alleviate the financial insecurity faced by bus providers against the contract with the PTAs, due to cash flow issues, which are often worsened by the loss-making operations of these authorities. However, the effectiveness of the PSM scheme will depend on its ability to ensure prioritised payments to GCC bus providers by PTAs in the country.

The second most endowed segment is the grant outlay, with a sum of INR 2,000 crore for setting up charging stations in the country, which as per certain reports is also likely to focus on the charges for the E-2Ws and E-3Ws, which were not focussed in earlier schemes, given their higher stock in the existing system as well to support the growth. This support will be quite critical given that charging as a business especially public charging, due to low utilisation rates, has led to their closures worldwide and not only in India. With a proper incentive structure chargers may still meet their obligations even at lower utilisations as it is a negative working capital cycle business.

The third largest category of the scheme is E-2Ws, with a budget of INR 1,772 crore or 16% of the total, aimed at promoting the adoption of 2.5 million in the next two years. This marks a significant shift from the earlier FAME II, where the incentives for e-2Ws were as high as INR 65,000 per vehicle. However, under the current scheme, the incentives have been reduced to INR 10,000 per vehicle, and will further decrease to INR 5000 per vehicle in the second year. This renewed confidence in the maturity of the 2Ws segment is based on the increasing sales, with around 0.7 and 0.9 million vehicle registrations during FY23 and FY24, and over 0.5 million sales already recorded in the first 6 months of FY25. These numbers represent almost 50% of the scheme’s target for FY25.

The growth in this segment can be credited to the development of products with smaller battery options. This has reduced costs in the entry segment of electric two-wheelers (E-2Ws) and improved production margins for manufacturers. Manufacturers are aiming to integrate productions as much as possible vertically. Late entrants like Bajaj and TVS have also contributed to the segment’s strong performance. However, for deeper penetration in the segment, E-2Ws must be profitable for producers, compete effectively with conventional vehicles, and for the vehicle category be prepared for higher GST charges, which currently stand at 5% compared to 28% and higher for conventional vehicles, as well as higher road registration charges.

One major change from the previous scheme is the use of e-vouchers to pay incentives to the manufacturers. However, delays in payments of these vouchers could exacerbate cash flow issues for many of these players. By aligning the phased manufacturing programme with localisation targets under PM E-DRIVE, the scheme aims to streamline incentive qualification.

The updated scheme includes incentives for E-ambulances and E-trucks, which will help establish a performance track record. This will assist financiers and manufacturers in making well-informed decisions regarding financing and product development respectively.

As EV adoption grows, the focus must shift towards innovative financing solutions to drive deeper penetration across the country, going beyond demand incentives.

By Vaibhav Pratap Singh, Executive Director, Climate and Sustainability Initiative (CSI)

Originally Published in The Financial Express (Online)