Unintended consequences

Subsidy on EVs must be revisited

Government intervention in the functioning of markets can often lead to unintended consequences. Market participants aim to maximise returns, which is not always in line with the spirit of the rules designed by the state. The latest example in this context is the subsidy provided for electric vehicles (EVs) under the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) scheme. As reported by this newspaper, some electric two-wheeler manufacturers have been violating rules at different levels. It was first reported that some firms were not following the localisation norms. In order to be eligible for the subsidy, EV makers have to show that, up to an extent, parts are manufactured or sourced locally. However, it was observed that some EV makers were not following the norm and depended on imports, presumably to contain costs. This partly defeats the purpose of the subsidy because it would not help develop an indigenous value chain to enable sustainable growth.

It has now been reported that EV makers are being probed for bypassing the price cap set by the government. Under the FAME scheme, a subsidy is given to electric two-wheelers, subject to the maximum ex-factory price of Rs 1.5 lakh. The scheme provides a subsidy of Rs 15,000 per kWh in the two-wheeler segment and is capped at 40 per cent of the vehicle cost, subject to a maximum ex-factory price. This results in an actual subsidy of Rs 17,000 to Rs 66,000 per electric two-wheeler. According to complaints received by the government, some EV makers are charging separately for things such as EV chargers and “intrinsic essential software” to meet the price cap. The government has so far barred 17 manufacturers from the pool of 64 registered under the scheme. The ongoing investigation may find more manufacturers violating the norms.
 

The government is subsidising EVs to help consumers make the transition. Adoption of EVs in a big way will help reduce vehicular pollution in cities, which has become a major challenge. It would also assist in containing the import of fuel — assuming power generation progressively moves to renewables — and improve external financial balance. To be sure, the sale of EVs has picked up, though on a relatively small base. Although the subsidy has helped improve their adoption, recent developments suggest that it needs to be reviewed. At macro level, it is worth pondering as to what level the government would be subsidising EVs as penetration increases. It is also encouraging manufacturing under the production-linked incentive scheme.

At micro level, the scheme will need to be redesigned. Instead of capping the price, which can lead to manufacturers compromising on quality and safety, the subsidy can be given directly to the consumer. Given the experience of direct benefit transfer, this should not be difficult. The subsidy can also be passed on to the consumer through lower interest rates on loans for EVs, and the government can pay the difference to lenders. Besides, the fact that EV makers are able to charge over and above the price cap suggests consumers are willing to pay. Thus, the level of subsidy can also be revisited. The localisation condition can be monitored with better use of technology. Given the limited state capacity, the government should always aim to design programmes more efficiently with an eye on market realities.