Analyzing the Effects of Subsidy Reduction on EV Adoption in India: A Legal Perspective

EV Adoption in India

Subsidies have long served as catalysts for technological adoption and market stimulation in sectors that align with broader societal and environmental objectives. The Electric Vehicle (EV) market in India is a prime example of such a sector. By offering subsidies and incentives, the government has aimed to make EVs a more appealing and economically viable alternative to conventional vehicles. The pivotal role of subsidies in fostering EV adoption in India cannot be overstated. The government initially provided substantial subsidies and incentives to stimulate the burgeoning EV market. However, a recent reduction in subsidies for electric two-wheelers has sparked considerable debate and concern.

Initially, under the National Electric Mobility Mission Plan (NEMMP) 2020 and the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India (FAME India) scheme, the Government introduced substantial financial incentives to stimulate the growth of the EV market. These incentives ranged from direct subsidies on the purchase price of EVs to indirect benefits such as tax exemptions and deductions. For instance, electric two-wheelers previously received subsidies of up to 20,000 INR per kWh under the FAME II scheme. This effectively reduced the upfront cost of EVs for consumers, promoting their broader adoption.

Additionally, manufacturers received incentives for local production of EVs and EV components such as batteries to boost domestic industry and reduce dependency on imports. For startups and small businesses engaged in the production of EVs or associated infrastructure, the government provided financial support and favourable loan conditions. All these measures combined contributed to a burgeoning EV market in India.

However, the government has now decided to reduce subsidies for electric two-wheelers. This decision has led to a surge in the retail prices of electric two-wheelers causing considerable concern among manufacturers, consumers and other industry stakeholders.

The implications of this sudden reduction are significant. Electric two-wheelers, due to their cost-effectiveness and suitability for urban commuting constitute a significant portion of the EV market in India. With the subsidy reduction, these vehicles have become less affordable which could lead to a slowdown in EV adoption. The Society of Manufacturers of Electric Vehicles (SMEV) has vocally expressed these concerns stating that the abrupt subsidy reduction might lead to a major decline in EV adoption in India.

The repercussions of this decision are not limited to the commercial aspects. It also raises several legal and regulatory questions about the government’s role in supporting the EV market. Is the government entitled to abruptly alter the subsidy regime? What are the potential legal remedies for manufacturers and consumers affected by this sudden change? These questions underscore the significance of a consistent and predictable regulatory framework in stimulating the growth of nascent industries such as the EV market in India.

The sudden cutback in subsidies could lead to a slew of legal challenges from various industry stakeholders and consumers. For one, electric vehicle manufacturers might claim that the reduction has led to substantial business losses. These companies made investments and strategic decisions based on the prior subsidy structure and the government’s commitment to promoting the EV industry. The sudden reduction in subsidies could be viewed as a breach of the government’s implied contract with these manufacturers.

Furthermore, industry associations such as the Society of Manufacturers of Electric Vehicles (SMEV) could also legally contest these changes. They could argue that the sudden subsidy reduction is a form of unfair trade practice. According to them, the government’s sudden change in policy may adversely affect the level playing field in the automotive industry giving an undue advantage to conventional vehicle manufacturers over EV manufacturers.

Consumers who are the end beneficiaries of these subsidies might also raise legal objections. They could argue that the abrupt withdrawal of subsidies amounts to an unfair practice as it affects their ability to afford and adopt cleaner, eco-friendly electric vehicles. In a class action suit, consumers could potentially seek remediation for the increase in costs they would have to bear due to the subsidy reduction.

Section 80 EEB of the Income Tax Act, 1961 allows deduction in respect of interest paid on a loan taken for the purchase of an Electric Vehicle. Section 80 EEB  allows claiming tax savings of up to Rs 1.5 lakh on interest paid on a loan made specifically to purchase an electric car. 

The loan, however, must be sanctioned anytime during the period starting from 01.04.2019 till 31.03.2023.

“Electric vehicle”, in the Act has been defined to mean a vehicle which is powered exclusively by an electric motor whose traction energy is supplied exclusively by a traction battery installed in the vehicle and has such electric regenerative braking system, which during braking provides for the conversion of vehicle kinetic energy into electrical energy. The Finance Minister of India – Mrs. Nirmala Sitharaman, in the Union Budget of 2023 has made Electric Vehicles even more affordable by extending battery subsidies for another year. Section 80EEB tax deduction benefit is a significant contributor towards the growing popularity of electric vehicles among the common people in India.

Beyond the legal challenges, there are important regulatory considerations to bear in mind as well. The reduction in subsidies might raise questions about policy inconsistency. Frequent changes in policy, such as those relating to subsidies can create an unstable business environment, deterring both domestic and foreign investors. This could potentially slow down the growth of the EV industry and hamper India’s efforts towards a greener more sustainable future.

Moreover, the sudden change could lead to non-compliance issues. Businesses that had set their prices based on the subsidies might find themselves in violation of price-related regulations due to the abrupt change in the subsidy structure. Additionally, there could be challenges related to the enforcement of new subsidy rules and potential disputes over the interpretation of these rules.

All these issues underscore the necessity for the government to consider the potential legal challenges and regulatory implications before making substantial changes to established frameworks. It also highlights the importance of maintaining a stable and predictable regulatory environment to foster the growth of emerging industries such as the EV sector in India.

EV manufacturers and industry stakeholders may consider several strategies to navigate the subsidy reduction impact. Firstly, businesses can focus on reducing costs through efficiencies in production, supply chain optimization and innovative technology implementation. By doing so, they can keep the prices of electric vehicles competitive despite the reduction in subsidies.

Secondly, manufacturers could explore collaborations or partnerships to share costs and risks associated with developing and promoting EVs. Joint Ventures in manufacturing or technology development can foster innovation and drive down costs.

Thirdly, companies can increase their marketing efforts to educate consumers about the long-term financial and environmental benefits of EVs. This could help in maintaining or even increasing the demand for EVs, even in the face of higher prices due to reduced subsidies.

Manufacturers can consider alternative financing options such as green bonds or sustainability-linked loans to fund their EV initiatives. Green bonds, in particular, have seen a surge in popularity with investors keen to support environmentally friendly projects.

Another alternative could be to introduce customer-centric incentives like battery leasing or attractive financing schemes. Battery leasing programs can help lower the upfront cost of EVs thus making them more affordable for consumers.

Policymakers can play a crucial role in sustaining EV adoption despite the subsidy reduction. 

Firstly, they could consider a phased reduction of subsidies rather than an abrupt cutback. This would give stakeholders sufficient time to adjust to the new policy landscape.

Secondly, policymakers could divert their focus towards building robust EV infrastructure like charging stations. Improved infrastructure can make EVs more convenient for consumers thus increasing their appeal.

Thirdly, the government could incentivize the manufacturing of EV components locally to reduce the overall cost of production and make EVs more price-competitive.

Finally, a reassessment of the current subsidy scheme could be beneficial. The government could consider targeted subsidies for specific groups such as public transportation or commercial fleets. This could ensure the efficient use of government resources while still promoting the adoption of EVs.

The reduction of EV subsidies in India presents significant challenges to the industry. However, through strategic measures and concerted efforts by manufacturers, industry stakeholders and policymakers it is possible to navigate this impact. While the path may be challenging, alternative financing options, innovative customer-centric incentives and supportive government policies could bolster the sector’s resilience. Ultimately, the goal is to continue progressing towards a sustainable transportation future for India.