Why Government is Prioritizing PLI over FAME II for Electric Vehicles

By: Sudhakar Singh, Editor | Monday, 13 March 2023

The Indian government is considering the discontinuation of the FAME II scheme, which is valued at ₹10,000 crore, after the next fiscal year. “Instead, incentives focused on production linked incentives (PLIs) could be used to support and grow the electric vehicle sector,” said officials familiar with the deliberations.

The Production-Linked Incentive scheme proposed for the production of electric vehicles was a much-needed step to promote the manufacturing of electric vehicles in the country. It has proved to be a better approach than FAME subsidy (Faster Adoption and Manufacturing of Electric vehicles) offered by the government. The incentive is encouraging manufacturers to ramp up their production, which is also creating jobs. Let us look at the main reasons why government is prioritizing PLI over FAME II for electric vehicles.

Encouraging greater production efficiency

The production-linked incentive (PLI) scheme is encouraging manufacturers to improve their production processes and product quality to meet the performance criteria set by the government. This has led to the production of more efficient and reliable EVs that meet consumer demands and reduce the running costs of the vehicles. The PLI scheme incentivizes manufacturers to bring new ideas, technologies, and designs to improve the efficiency and reliability of their EVs. This can include the use of better battery technologies, advanced motor systems, and innovative manufacturing techniques. The scheme also encourages manufacturers to invest in research and development to create new products that meet the evolving needs of consumers.

On the other hand, FAME subsidy may not necessarily lead to increased production efficiency. In fact, it could potentially lead to complacency and a lack of innovation. If manufacturers become too reliant on subsidies, they may not feel the same pressure to reduce costs and improve efficiency as they would without them. Additionally, subsidies could potentially create market distortions that benefit specific companies at the expense of others, which could ultimately hurt efficiency.

Ensuring long-term sustainability

Unlike subsidies, PLI is a financial incentive that is designed to operate over several years. This long-term approach ensures that EV manufacturers can plan their production and supply chain strategy, secure investments, and compete against global competition. A stable and predictable demand, facilitated by the PLI scheme, will help the industry to grow and develop sustainably over time. Additionally, the PLI scheme offers incentives that are directly linked to the production level of the manufacturers. This means that the more a manufacturer produces, the more incentive they receive. This approach not only incentivizes manufacturers to produce more, but also encourages them to invest in research and development to increase their production capacity.

As for the FAME subsidy, it is not a long-term solution for ensuring sustainability. Subsidies are typically funded by tax revenues or borrowing, which means that they are ultimately paid for by taxpayers or future generations. Governments may not be able to afford to maintain subsidies indefinitely, particularly if the EV industry grows rapidly and requires more funding. Moreover, subsidies may not be effective in achieving the desired outcomes. If EVs are still not competitive with gasoline vehicles in terms of price and performance, then subsidies may not be enough to make them mainstream. In addition, subsidies may not address other barriers to adoption, such as inadequate charging infrastructure and consumer preferences.

Boosting innovation

The production-linked incentive scheme demands a high level of research and development from the OEM's, resulting in the development of new technologies and manufacturing processes. This dynamically helps to create a unique market space for manufacturers to play differently, reducing dependence on expensive imports and incentivizing them to keep investment and create jobs within the country. The scheme encourages innovation, which will improve product quality, increase efficiency, and ultimately reduce the price of EVs over time.

FAME subsidy, on the other hand, may not boost innovation. Subsidies may create a reliance on government funding rather than encouraging companies to develop new technologies through their own investments. They may lead to cost-cutting measures in development, ultimately slowing the pace of technological advancements. Subsidizing EV production only tackles one aspect of the problem, but does not address the issues of infrastructure development and standardization to support mass adoption. If not effectively targeted, subsidies can end up benefitting established automakers, rather than incentivizing start-ups or research organizations with bright new ideas.

Going forward, PLI is expected to boost the sale and customization of EVs in India, leading to increased demand and the growth of the EV manufacturing sector. It will continue to incentivize companies to invest more in R&D to develop advanced EV technologies, which can contribute to the growth of the industry. Furthermore, the scheme is expected to generate direct and indirect employment opportunities, contribute to the growth of related industries like battery manufacturing, and eventually lead to economic growth.