Unintended consequences – Subsidy on EVs must be revisited

Source: The post is based on the article “Unintended consequences – Subsidy on EVs must be revisited” published in the Business Standard on 10th February 2023.

Syllabus: GS 3 – Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

Relevance: About Subsidy on EVs.

News: Government subsidy provided for electric vehicles (EVs) under the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles (FAME) scheme might have some unintended consequences.

Why government is providing Subsidy on EVs?

The government is subsidising EVs a) To help consumers make the transition of adoption of EVs, b) EVs will help reduce vehicular pollution in cities, c) The EVs will assist the government in containing the import of fuel, d) To improve external financial balance.

How do the Subsidy on EVs cause unintended consequences?

Market participants aim to maximise returns, But this profit maximisation is not always in line with the spirit of the rules designed by the state. This might hold true for EVs. Hence, EV subsidies cause unintended consequences. Such as,

a) Some electric two-wheeler manufacturers have been violating rules at different levels, b) Some firms were not following the localisation norms and depend on imports, presumably to contain costs, c) EV makers are also being probed for bypassing the price cap set by the government.

All this partly defeats the purpose of the EV subsidies, because it would not help develop an indigenous value chain to enable sustainable growth. Hence, the government has so far barred 17 manufacturers from the pool of 64 registered under the scheme.

How India can revamp the Subsidy on EVs that are causing unintended consequences?

At the micro level, the scheme will need to be redesigned. Such as a) Instead of capping the price, the government can give subsidies directly to the consumer, like direct benefit transfer, lower interest rates on loans for EVs, etc, b) The localisation condition can be monitored with better use of technology.