Will FAME II Probe Into EV Non-Compliance Throw A Spanner In The Works, Hinder Growth?

If the future of mobility is green (read predominantly electric), how far is India from that coveted milestone where electric vehicles will be sold on par with internal combustion engine (ICE) vehicles?

Unlike the US, where luxury car buyers snap up the Teslas and the Ford Mustangs (Mach-E) without batting an eyelid (even cost-efficient models are priced around INR 70 Lakhs or more), India is witnessing more of a mass market transformation with the focus firmly on affordable battery-electric vehicles and ground-up EV designs.

More than speed or other features, affordability is a crucial factor in a market like India, as validated by the number of two-wheelers and three-wheelers (mopeds/e-bikes and auto rickshaws, to be precise) sold compared to four-wheelers, luxe or otherwise.

But what has been widely lauded is the country’s ambitious goals to promote EV adoption at every level, bolstered by policymakers, homegrown automakers and the ubiquitous innovators – the Indian startups.

“The government intends to have EV sales penetration of 30% for private cars, 70% for commercial vehicles, 40% for buses and 80% for two- and three-wheelers by 2030,” Nitin Gadkari, minister of road transport and Highways, stated in October 2021, based on the Indian think tank NITI Aayog’s blueprint.

In general, the outcome has been commendable. Out of the 47 Lakh vehicles registered in 2023 (data up to March 19), more than 2.79 Lakh were EVs, accounting for nearly 6% of the total number.

Does this mean India is on track to achieve its 2030 EV goals? Not exactly, if we delve deeper and analyse more granular data.

Compared to total EV registrations (1,21,735) in November 2022, the data clocked during December 2022-February 2023 indicates a slowdown in EV sales across most categories, including 2W, 3W and e-buses. This is quite alarming as EV two-wheelers dominate the domestic market, given their affordability, accessibility and the rapidly increasing fuel prices across the country.

With an average top speed of 80 km per hour and 100 km per charge, the 2W range has been developed by more than 12 local manufacturers and is mostly priced under INR 1.5 Lakh ($1,800). Their sales accelerated in November last year, but then the numbers stopped going north except for Ola Electric.

Sales of EV three-wheelers, cars and e-buses also saw a slide in January this year. However, the 4W sub-segment recovered in February and posted a 27% rise, thanks to many entry-level car launches by Tata Motors, BYD, Citroën and Mahindra Electric.

But the question remains: What’s hindering the EV sector’s steady growth now that India has stopped courting Tesla and focussing on a homegrown EV ecosystem?

Interestingly, most EV stakeholders contacted by Inc42 for this story have blamed the stagnating numbers on how the authorities deal with compliance issues under FAME II, a project initially launched in 2015 to support and accelerate the EV industry in India. But before we get into what may have gone wrong in recent years, a quick look at the FAME template will help one understand the project’s scope and goals.

How The FAME Template Was Designed To Drive EV Growth

The Indian government launched the National Electric Mobility Mission Plan (NEMMP) in 2013 to achieve 6-7 Mn sales of electric and hybrid vehicles by 2020. As EV costs are 30-40% higher than their ICE counterparts, the government set up FAME, short for Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India, under NEMMP in March 2015 to promote EVs among Indians.

The first phase of FAME continued until March 31, 2019, and saw an allocation of INR 895 Cr, out of which INR 529 Cr was released. The remaining INR 366 CR was reallocated to the government’s FAME II scheme.

FAME I focussed on early market creation through demand incentives, in-house technology development and domestic production to help the industry reach self-sufficient economies of scale.

It provided demand incentives for adopting 2.8 Lakh EVs (2W, 3W and 4Ws) and 425 electric and hybrid buses, besides the development of 520 charging stations.

FAME II came into force in April 2019 with a budget of INR 10K Cr (including the remaining INR 366 Cr committed under FAME I) for three years. However, with the onset of the Covid-19 pandemic in 2020 and several socio-economic setbacks that followed, the FAME II subsidy period was extended to March 2024. Its focus areas included financial incentives for EV purchase, charging infrastructure development and all other related activities.

Barring the past few months, FAME II has played a pivotal role in the growth of the EV industry, and its subsidy schemes became an instant hit among buyers and OEMs.

Key Parameters To Meet FAME II Compliance 

Based on the feedback of industry stakeholders, FAME II was overhauled in June 2021 to ensure a faster proliferation of EVs by lowering upfront costs. While the government earlier offered an incentive of INR 10K per kWh (indicates energy consumed per hour) for two-wheelers, it was increased to INR 15K per kWh, with the maximum cap increased from 20% to 40% of the vehicle cost.

The maximum ex-factory prices for two-wheelers, three-wheelers and four-wheelers were kept unchanged at INR 1.5 Lakh, INR 5 Lakh and INR 15 Lakh, respectively, for manufacturers to avail of FAME II incentives.

It was a nudge in the right direction for the cost-conscious Indian market as sales of electric two-wheelers rose to more than 5K a week compared to the earlier weekly number of around 700.

EV makers were also required to use locally produced components such as battery packs, traction motors and controllers, vehicle control units, onboard chargers and instrument panels in a phased manner. All other components should be sourced locally to meet FAME II compliance to obtain subsidies.

This means OEMs must declare their domestic value addition (DVA), a metric indicating how much value an EV manufacturer has created locally for every EV unit. At least 50% of vehicle components must be sourced from India to qualify for the FAME II incentive scheme.

The Beginning Of A Bumpy Ride

Between April and September 2022, the ministry of heavy industries (MHI) received several letters from whistleblowers claiming that EV manufacturers such as Okinawa, Hero Electric, Ampere and Benling India flouted FAME II norms and imported the components from China which were supposed to be manufactured or assembled in India.

The ministry decided to start a probe. Speaking to the news agency PTI in November 2022, the minister for heavy industries, Mahendra Nath Pandey, confirmed the developments. “We are strictly investigating the matter. If our conditions have been flouted, requisite action will be taken,” he said.

“These very guidelines were notified only after consulting the key stakeholders. But by mid-2022, we noticed that at least 36 vehicle models registered under FAME II could be flouting the guidelines. They did not meet the 50% DVA requirement. Some of these players directly imported the components such as battery packs or got them imported through other vendors they work with. They then claimed these as made-in-India products. But these are supposed to be manufactured or assembled locally. This is not the way we want to achieve the numbers. This will not help build the ecosystem. There must be a stopcock and due investigation [to stop this],” an MHI official earlier told Inc42 on condition of anonymity.

The MHI has been probing more than 12 OEMs whose EV brands were granted subsidies under FAME II. Also, the Comptroller and Auditor General (CAG) is reportedly looking at their books to determine whether these players claimed incentives despite non-compliance regarding minimum localisation mandates.

During the ongoing FAME II probe, the total number of approved EV models declined from 152 in August 2022 to 130 in November, as per the FAME II dashboard.

FAME II Compliance Norms: Who Flouted What

Aware of the non-compliance issues regarding component localisation, performance and safety standards, the government stalled subsidies worth INR 1,100 Cr by October 2022. While subsidies for all EV models developed by Okinawa Autotech, Hero Electric, Victory Electric Vehicles, Thukral Electric and other OEMs now stand cancelled, a departmental inquiry by MHI has also been initiated against a few EV behemoths, including Ola Electric, Ather Energy, Ampere and Revolt Motors.

According to the MHI official who spoke to Inc42, Okinawa, Hero Electric, Victory, Thukral and Energy Electric are accused of flouting the latest PMP norms. On the other hand, players like Ola Electric and Ather Energy are accused of exceeding the price limits set by the government.

Here is a quick look at some of the accused EV OEMs, the norm/s they have allegedly flouted, and the probe status. 

Both Ola Electric and Ather have been called out for flouting the ex-factory price limit of INR 1.5 Lakh as their final pricing may exceed INR 2 Lakh.

Earlier, the Federation of Small Industries (FSI) wrote a letter to the MHI, alleging that to claim the FAME subsidy, Ather fraudulently “managed to bypass the subsidy eligibility limit of Rs 1.5 lakh set by the MHI by stealthy separating the ‘EV charger’ and the ‘intrinsic essential software’ that are integral parts of the vehicle”.

Inc42 could not independently verify these allegations but contacted the EV players under the government’s scanner for clarity and comments. Their responses will be included as and when we receive them.

MHI Fixing A Few Bugs In Real Time

Although a probe is underway, the government wants EV growth to stay on track. During the inquiry, the MHI found that getting a certification from the Automotive Research Association of India (ARAI) for would not be adequate, as the OEMs could change the DVA parameters in the next lot.

The ministry also took a proactive approach to bridge data gaps and break data silos. It held meetings with EV2W players on September 22 and 23 last year and released an API-based online data transfer system on October 1 to ensure that DVA and PMP compliance data can be updated in real-time.

With the help of the API, DVA will now be calculated for every batch of EV production, along with their chassis numbers. This will help OEMs avoid a separate audit for DVA evaluation.

Several representatives from Ola Electric and Ather Energy met key officials from the MHI earlier this year to discuss the price caps, but the ministry has yet to take a decision regarding pricing.

Will The Cost Of Non-Compliance Impact India’s 2030 EV Vision?

India is a unique use case where EV adoption is led by two-wheelers and three-wheelers. Nevertheless, production remains expensive, given the global chip shortage and a rise in material costs, especially the essential materials needed for EV batteries.

More importantly, the country focusses on pure-play electric vehicles instead of hybrids or plug-in hybrids, which means a surge in cell or battery mineral costs will push up prices. Therefore, sticking to a flat price label or a homegrown supply chain may not always be feasible for OEMs unless there is a robust support system at home. Time and again, such factors have resulted in non-compliance and a delay in the launch of multiple models.

India needs a support system first: Explaining the lack of component-making in India, especially for the EV industry, Mohandas Pai, Partner, Aarin Capital, and former CFO of Infosys, had earlier told Inc42, “The FAME [II] scheme has got stuck in a controversy. But you cannot penalise everybody after committing because a support system has not come up; it is not there in the country. This is very wrong.”

Aware of how pedantic policy revisions could hurt OEMs’ bottom line in a competitive market, companies like PuR Energy (Pure EV) decided not to apply for FAME II subsidies. Staying away from the current scheme has given them the flexibility to access the global supply chain and work with multiple suppliers at home and abroad.

Many stakeholders also think FAME II is ad hoc in nature, as it would have ideally taken more time and planning to build a robust, nationwide EV component supply chain. As for component makers, the problems are multilayered, from procurement to scaling up to maintaining quality and safety standards and more. Quite a few companies are also struggling with liquidity issues since the pandemic.

“There are several reasons why complying with FAME II guidelines has become so difficult,” said an EV startup founder who did not wish to be named.

“To begin with, we don’t have enough [EV] auto part manufacturers in India. Second, local vendors charge more than what we pay to Chinese companies. Then there are problems with quality consistency. Quality standards tend to differ even when you buy, say, five units of XYZ from the same supplier. This is not the case when we import auto parts. Finally, you have to keep the costs in check. The government has reduced the GST on auto parts, but it is still in the range of 12-18%, while the GST on the vehicle is 5%. This is also adding to the cost.”

Some EV manufacturers who previously sourced from domestic suppliers are reportedly importing from China due to lower prices.

For context, the government has already announced a couple of production-linked incentive (PLI) schemes to bridge these supply gaps. One of them, with an outlay of INR 25.9K Cr, is designed for the auto component sector. The other one, with an allocation of INR 18.1K Cr, is meant to bolster the ACC battery industry at a pan-India level.

Randheer Singh, director of electric mobility and a senior team member of the advanced chemistry cells (ACC) programme at NITI Aayog, told Inc42 when these schemes fructify in about two years, there would be supply chain efficiency, and the EV prices would automatically go down. Incidentally, Singh developed the EV report for the Indian government.

But until then, OEMs have limited options to meet DVA and PMP guidelines, and compliance may come at the cost of quality, experts say.

This is a scary thought, given the recent EV fire incidents, which spurred public outrage and had the EV players scrambling to contain the fallout.

Clearly, there needs to be an adequate support system in place first.

More subsidies, please; INR 10K Cr is not enough: Stakeholders are unhappy with FAME II allocations and constantly demanding a robust policy and better incentives to execute the 2030 plan.

“In 2017, China disbursed incentives worth INR 54.8K Cr+ in one year. Look at what we got then – INR 165 Cr! Now, they (MHI) are saying they will recover the subsidies extended under FAME II if companies are found non-compliant,” said a disgruntled founder who did not want to be named.

The EV industry would need more in subsidies, demanded SMEV, India’s premier EV lobby representing around 90 companies. In its presentation to the Rajya Sabha Secretariat in January 2023, SMEV claimed that India would require incentives worth at least INR 1.65 Lakh Cr in the next seven years to meet the 2030 target.

Although the government increased its Budget allocations significantly, from INR 2898 Cr in FY22-23 to INR 5,172 Cr in FY23-24, SMEV, in its presentation, demanded INR 9,084 Cr for FY24, considering that more than INR 1,100 Cr was pending for FY22.

In such a tricky situation, India’s ambitious plans to grow annual EV sales significantly by 2030 may hit a speed bump.

Singh of NITI Aayog is optimistic, though.

“There are various areas in an EV business. One is cell manufacturing, accounting for 40-45% of the total vehicle cost. Then, you have vehicle components and electronic parts. But the government has already launched two PLI schemes, and these areas will be taken care of in the next two years,” he said.

“The right time to assess the situation will be 2024. Once we have a clear idea of what more is required and where, decisions can be taken accordingly. I don’t think this is the right time to comment on the overall scenario,” he added.

However, the current scenario takes us back to NEMMP and its unrealised goals. Even after seven years, its plans to manufacture 6-7 Mn EVs from 2020 onwards fell flat. We only reached 0.125 Mn EVs in 2020, nearly a 50x slide from the target, despite the launch of FAME I in 2015 and its additional advantages.

Can we fix the bug in time?

[Edited by Sanghamitra Mandal]

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