Electric 2-wheelers may need more domestic value addition for subsidy

The EMPS replaced the FAME-II scheme, where auto companies were provided Rs 11,500 crore as subsidy

In a move that could support companies looking to raise their value addition and reduce imports, the government is learnt to be considering increasing the eligibility condition of domestic value addition (DVA) in electric two-wheelers for subsidy under the new Electric Mobility Promotion Scheme (EMPS), provided it is extended beyond July 31. The heavy industries ministry is expected to seek an extension of the scheme.

Under the existing rule, companies must have at least 50 per cent localisation to qualify for the subsidy. While the government is looking at half-yearly audits of companies to ensure they comply with the localisation norms, it is also considering various methods to calculate value addition — through definitions of manufacturing phase and production-linked incentive scheme, and so on.

The EMPS, which has a budget of Rs 500 crore for only four months starting from April 2024 — replaced the FAME-II scheme, where auto companies were provided Rs 11,500 crore as subsidy. The scheme was introduced in the Interim Budget and the allocation was made for just a few months until the new government would present the full Budget.

The scheme has been restricted to only two- and three-wheelers. Passenger cars have been kept out of its ambit. Even the amount of the subsidy was slashed by half — from Rs 10,000 per scooter to Rs 5000 per Kwh. There is also a cap of Rs 10,000, irrespective of the battery power of the vehicle (earlier the cap was around Rs 22,000).

The FAME-II scheme had run into a major controversy over localisation. It was alleged that many electric two-wheeler companies violated the requirement of 50 per cent localisation, especially during the pandemic, and continued to apply for and receive subsidy despite not being eligible.

The government sent showcause notices to companies like Hero Electric and Okinawa, among others, for violating the localisation norms, and asked them to return the subsidy along with a fine. While many did pay, Hero Electric and Okinawa challenged the decision and stopped production.

To ensure that such violations do not take place in the future, the government is now looking at a more frequent audit of companies to ensure that there is no divergence on domestic value addition.

Clearly, the government wants to incentivise localisation, especially as the industry has now reached reasonable volumes, touching 1 million electric two-wheelers in 2023. What’s more, the country also has a reasonable supply chain now, with battery manufacturing and battery packaging capabilities. 

Many electric two-wheeler companies like Ola already have a domestic value addition of 55-60 per cent (cells are not considered for DVA as they continue to be imported). Ather, the other electric two-wheeler company, has achieved a localisation of around 70 per cent.

However, sources in the know say that a balance has to be struck because an over-ambitious value-addition target will only force electric vehicle makers to go for imports, as they might find the subsidy of Rs 10,000 unattractive for localisation.

The industry has been pushing for continuance of the EMPS scheme, arguing it will help the growth of electric two-wheelers, whose production could well reach 1.4 million by the end of this financial year.