EV Revolution Could Be A Costly Affair; Governments Must Be Ready To Prioritise Commercial Vehicles In Subsidies

The entry of Ola into the electric vehicle market has set the cat among the pigeons. By offering a two-wheeler EV which has decent range (by scooter standards), impressive digital tech features on a touchscreen hitherto available only in cars and high acceleration with speed at a price that is competitive (after subsidies by centre and states, of course) with Internal Combustion Engine (ICE) vehicles, Ola is set to disrupt the market.

It has bet big by setting up its Futurefactory in Tamil Nadu, which boasts of production capacity of one crore units per annum by next year. While two-wheeler EV startup Ather is not behind in providing equally attractive features, what sets Ola apart is its budget pricing.

The hope is that the volumes will compensate for lower profit margins per vehicle. If Ather also manages to scale up to avoid being blown away by Ola, it can also cut prices in future. What Ola has shown is that there is definitely great demand in the EV segment if consumers are offered a value product at an affordable price.

In the first 24 hours of unveiling its scooter, Ola claimed to have received over one lakh bookings; however, surprisingly, the company hasn’t revealed any number after that. But if these figures are correct, they are impressive enough when we look at annual sales figures of EV scooters. In 2020, the whole industry sold only 30,000 odd vehicles. In the first half of fiscal 2021-22, a similar number of EVs have been sold, which shows that the total annual sales might double. Still, it’s 40 per cent short of Ola’s one-day bookings claim.

Surely, the existing and leading ICE players who are selling over 1.5-2 crore two-wheelers per year are not going to sit idle and let the likes of Ola and Ather to pull the rug from under their feet. They are going to invest big and launch their own products. But one thing is certain that the EV revolution, at least in the two-wheeler segment, now seems unstoppable.

However, one should not loose sight of a major factor that is making it all possible: state subsidies. And too much success in a short time can really force the governments into a rethink and halting the gravy train. The whole budget of phase 2 of Centre’s FAME scheme for three years is Rs 10,000 crore and its stated goal is to hope to generate demand for ten lakh two-wheeler EVs (goals for other EVs are different). But going by Ola’s claims, its production capacity and general potential in this segment, the annual sales figure of a million two-wheeler EVs is not far.

Then there is a good chance that at least half of all two-wheeler sales in the next five years are going to be EVs which means that at least one crore units (conservative figures given yoy growth which will only increase as more people move out of poverty to lower-middle classes and they don’t have to worry about recurring costs such as oil prices to use the vehicle). That means a 15,000 crore subsidy at the centre level alone. Again, a conservative figure. Now, add another Rs 15,000 crore of subsidies at the state level. And this is in addition to the revenue foregone due to the removal of registration charges and road tax in many states.

Now, one might argue that Rs 30,000 or even Rs 50,000 crore is not a big deal for the government given the benefits that will accrue to the environment because it’s estimated that two-wheelers accounted for majority of the petrol sales. But imagine the revenue loss to the government if half of the petrol sales disappear. Centre alone earned Rs 1 lakh crore in excise from petrol in FY2021. States’ share is extra. If the centre starts losing Rs 80,000 crore to Rs 1 lakh crore each year, it won’t have any option but to seriously rethink the subsidies.

And we haven’t even touched the non-two wheeler EV segment. That’s a whole another (more costly) ball game.

Given this upcoming challenge, what’s the way forward. One is hope and the other is policy. Hope is that the improvement in EV technology and economies of scale will take care of price to the extent that the subsidies, even if they exist, won’t be too burdensome for the exchequer. As far as policy is concerned, we will do good to remember Thomas Sowell’s dictum that ‘the first lesson of economics is scarcity. There is never enough of anything to satisfy all those who want it.’

Indian governments will have to prioritise soon on who to prioritise in subsidising. The obvious choice here is to go for commercial vehicles. Given that the tech is not yet here for heavy vehicles (like trucks), the focus can be on light commercial vehicles, including passenger vehicles which are owned privately but are in taxi service (the yellow number plate wallas). Five years ago, cars that went into taxi service were around 9 per cent of total passenger vehicle sales and were expected to reach 15-17 per cent by now. This section of vehicles would be the right one to target for the government.

The incentives can include full exemption from road tax, registration charges, toll tax or any recurring charges that are otherwise paid by commercial vehicles. Dedicated charging points for these vehicles, starting with all major cities, can be planned.

The EV revolution in car segment seems far as of now but it’s only because there is no decent sub-10 lakh car available in the market. That might change soon as Tata’s revamped Tigor EV is expected to be priced at 10 lakh (ex-showroom) and is rumoured to have a range of around 200 km in single charge. It’s pertinent to note that this is almost same as the average daily run of taxis in Indian cities.

In any case, the fast charger network will take care of the problem if the daily run is more or if range is less. Other companies like Mahindra, Maruti and Renault are also going to launch their budget electric cars soon. In fact, even Ola CEO Bhavish Agarwal has announced that EV cars are going to be on the company’s list after their scooter project. Just like in the two-wheeler EV, a rank outsider (apart from Ola) may shock and awe the car industry and disrupt the market.

The government should start preparing in advance and be ready. The EV disruption is inevitable and critical.