Why Government is Prioritizing PLI over FAME II for Electric Vehicles

Sudhakar Singh, Editor

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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 also promoting manufacturers in this regard to improve their production processes and product quality in order to comply with the performance criteria as set by the government. This has resulted in the development of EVs that are more efficient, reliable and that satisfy the demands of consumers, thus making the running costs of the vehicles lower. PlI scheme provides the impetus to the manufacturers to introduce new concepts, technologies, and designs for the purpose of betterment of EV efficiency and reliability. This can lead to the adoption of improved battery technologies, sophisticated motor systems, and new manufacturing approaches. Apart from that, the scheme also supports manufacturers in investing in R & D to innovate new products that are in tune with consumer requirements.

There is also the possibility that the FAME subsidy may not result in higher production efficiency levels. It could even result in not being proactive and not coming up with new ideas. If the manufacturers are overly dependent on subsidies, they could not be pushed to lower costs and increase efficiency as they would do in case of the absence of subsidies. The possibility also exists that subsidies distort markets which gives some companies the upper hand over others and consequently hurts efficiency.

Ensuring long-term sustainability

On the other hand, the PLI scheme is a form of non-financial incentive which is aimed to run over a number of years. In the long run, this aligns production, supply chain strategy, raise investment and compete with international manufacturers. A stable and predictable demand, which is brought about by the PLIScheme, will aid in the growth and sustainability of the industry. Besides, the PLI scheme also provides disincentives that are related to production output of the manufacturers. This simply implies that the more a manufacture produces, the higher their incentive. This model does not only create a motivation for manufacturers to produce more, but also promotes R&D to raise production capacity.

When it comes to FAME subsidy the fact that it is not a viable long-term solution is evident. Subsidies are normally financed either from tax revenues or by borrowing, which in the end boil down to taxpayers or future generations footing the bill. Governments may not be able to afford to subsidize EV industry in the long run, especially if it grows quickly and starts demanding more funding. Subsidies, however, may not reach the intended outcomes. In the case that EVs remain not competitive to gasoline vehicles in terms of price and performance, the subsidies might not be enough to make them main stream. Moreover, subsidies cannot guarantee the overcoming of other hurdles to adoption, like lack of adequate charging stations and customers’ preferences.

Boosting innovation

The PLI Scheme enforces the OEMs to go for intense research and development, which in turns, also leads to the development of new technologies and manufacturing processes. This way, the market space becomes distinctive without having manufacturers compete on imported expensive items as they also create jobs and keep their investment at home. The system fosters innovation, which in turn will lead to enhanced product quality, better efficiency, and ultimately more affordable EVs.

On the other hand, FAME subvention might be not capable of stimulating new development. However, subsidies could lead to such a reliance on government funding while the companies prefer investing their resources into developing the new technologies. These could result in cost-saving measures in development, which would only contribute to a slower speed of technological progress in the long run. This solution addresses one of the problems but ignores the problem of infrastructure development and standardization to help with the mass adoption of EVs. However, the subsidies may fail to help new start-ups or bright research organizations to create their own unique future in the case they are not distributed properly.

The PLI scheme in India in the future is expected to push the export of EVs, hence increasing the sales and customization to these EVs which in return will create the market for these EVs thus increasing the growth of the sector of EV manufacturing. The manner in which it is now, it will remain the key driver for the companies to spend more money on R&D so that they can further develop the EV technology and therefore the growth of the sector. On the other hand, the program should catalyze both the direct and indirect employment and promote industrial activities that are related to batteries manufacturing and ultimately result into long-term economic development.