Budget 2024: FAME Subsidies For EVs, PLI Benefits On Wishlist For Sitharaman

Finance Minister Nirmala Sitharaman may be able to please everyone with more capex and social spending in the full Union Budget for the fiscal while maintaining fiscal discipline, given the strong tax collection and the RBI's big bonanza dividend of Rs 2.11 lakh crore.

For the automobile industry specifically, the key question, apart from the extension of the FAME II scheme, is whether the government will continue to subsidise electric vehicles.

NDTV Profit examines the key measures that could potentially impact the automobile industry.

The government had earlier introduced Faster Adoption and Manufacturing of Electric Vehicles, or FAME, as a subsidy for purchasing an electric vehicle. Its earlier two incarnations—FAME I and II—led to a boom in sales of EVs, particularly after the pandemic, when personal mobility accelerated. The FAME II scheme was introduced in 2019 for a period of three years with an outlay of Rs 10,000 crore to subsidise electric vehicles across two-wheelers, four-wheelers, and commercial vehicles. This scheme was extended for a couple of years until March 31, 2024.

Thereafter, the new Electric Mobility Promotion Scheme 2024, or EMPS, succeeded FAME II, but its incentives were 50% lower than those of the previous scheme. The scheme was only for four months until July 31, 2024, with the outlay significantly reduced to Rs 500 crore.

The expectation of this scheme getting extended is a key monitorable. However, according to the Minister of Heavy Industries, HD Kumaraswamy, the FAME-III subsidy for EVs is unlikely to be introduced in the Union Budget 2024 as it is still in the final stages of development.

EVs have seen a slow start to fiscal 2025 amid reduced benefits, and a delay in the continuation of the scheme will hamper sales growth and EV adoption further.

Production-linked incentives, or PLI, remain one of the main demands of the auto and auto components makers.

Back in 2022, 95 of 115 applicants were brought under the ambit of the first phase of the incentive scheme. After that, the pace of updates and approvals has slowed significantly. Though some companies like Sona BLW Precision Forgings Ltd. have started getting the benefit in fiscal 2024.

Amara Raja Energy & Mobility Ltd. is still to get benefits from PLI for its advanced chemistry cell battery; faster turnarounds are expected, as per commentary by the company during its fourth-quarter earnings conference call. They anticipate opening bids for review within a month and declaring the results in another month.

More such specific PLI benefits would be beneficial for the auto and auto component industries if there was faster compliance with PLI schemes and funds were released on a quarterly basis for higher EV adoption. This would also aid the industry and smaller players further.

The government unveiled earlier this year its new electric vehicle policy to invite foreign carmakers to set up local manufacturing units in India. This will allow companies like Tesla Inc. to initially import their vehicles at a lower customs duty rate of just 15%, compared to 75% currently. They would be allowed to import 8,000 vehicles per year and would be expected to start manufacturing facilities over three years and achieve localisation of 25% in the time frame. Within five years of the plant's opening, this would rise to 50%.

But since the announcement, there has been little movement, either by the government or the companies. Elon Musk, the chief executive officer of Tesla, had planned to visit India and meet Prime Minister Narendra Modi on April 22, marking his first such visit and a significant boost to the government's localization programme, but 'Tesla Obligations' prevented this from happening. Instead, he visited China shortly, which was significant as Tesla reached an agreement with Chinese tech giant Baidu to use its mapping license technology for data collection on China's public roads. This cleared a key regulatory hurdle to the rollout of self-driving software in the country, which was a big win for Tesla and Elon.

While the government’s targets are stiff for localization, foreign carmakers would significantly benefit from the lower duty structure and market acceptance while building manufacturing facilities. Any additional budgetary action in this regard would be key monitorable. There have also been some media reports of Vinfast, which has already invested in setting up a manufacturing facility in India, holding discussions about being eligible under the scheme.

Additionally, local players such as Tata Motors Ltd. and Maruti Suzuki India Ltd. have also been said to hold discussions for any incentives for setting up EV dedicated facilities.

Custom duty increases on automotive parts like tyres, advanced batteries, and components will help domestic companies better compete versus international peers. Back in Budget 2021, there was a hike in customs duty, with an increase of 15% on certain auto parts. Domestic manufacturers benefited from the move, while vehicles assembled as Completely Knocked Down Units (CKD) faced disadvantages. A similar move would further promote domestic companies.

The Union Budget 2023 extended the customs duty exemption to capital goods and machinery imports, which are essential for the production of lithium-ion cells for electric vehicle batteries. The Union Budget 2023 eliminates customs duties on capital goods and machinery used to produce lithium-ion batteries for use in electrically powered vehicle batteries. According to reports, the action will lower the price of EVs throughout the country.

Finally, implementing a scrappage policy with rigor, particularly for trucks and buses, would be a key positive, especially for truck makers. Scrapping of old vehicles will be in line with the Budget 2021–22 policy on car scrapping. Finance Minister Nirmala Sitharaman declared her intention to allocate funds for the scrapping of the Central Government's 20-year-old vehicles. She said that states would receive assistance in upgrading outdated cars and ambulances. Beginning on June 1, 2024, fitness testing for the scrappage of other CVs and PVs will begin, taking into account the eligibility of the benefits received for scrapping. Some impetus and more focus on implementation while increasing benefits under this scheme could be critical.

The scrappage policy is important because it fuels demand for the purchase of newer trucks, especially for fleet operators. Post-pandemic, the demand for used trucks skyrocketed due to the lower price as well as an uncertain future, leading to the safety of purchasing cheaper trucks. One of the key steps includes setting up multiple scrappage centres and allowing a faster transition of accruing benefits for scrapping older vehicles to owners. It will be key to avoid any kind of cash flow constraint.