The Impact of Government Intervention on Demand for EVs

Table of Contents

Introduction

Methodology

Theoretical Foundation

Economic Analysis and Results

Evaluation

Conclusion

Limitations

Bibliography

1.1 Introduction

India is an emerging market economy, and is gradually becoming more interconnected in the global economy in parallel with their growth. However, this economic growth comes at  a cost to the country. India is consistently ranked among the top countries on metrics of pollution and greenhouse gas emissions globally with a significant composition of it being dedicated to emissions from vehicles across all sectors contributing around 305.3 MtCO2e to global emissions. The country’s contribution of almost 7.08% of global emissions necessitates the need for steps to be taken in order to curb this detrimental phenomenon.

The Government of India has thus launched multiple initiatives and schemes to promote sustainable development through the usage of clean energy sources. The Ministry of Heavy Industries had launched the first phase of the Faster Adoption and Manufacturing of (Hybrid &) Electric (FAME) policy, phase 2 commenced 1st April 2019 for 3 years with an implemented extension up until 31st March 2024. Under the  constructs of this scheme the government strives to promote “progressive induction of reliable, affordable and efficient electric and hybrid vehicles (xEV)” by incentivising the commercial purchase of Electric Vehicles (EVs) and offering subsidies in order to stimulate demand for EV for all industrial and productive purposes. With the total budget of Rs. 10,000 Cr. divided across demand incentives and capital subsidies of around Rs. 800 Cr. to the three Oil Marketing Companies (OMCs) of the Ministry of Petroleum and Natural Gas (MoPNG) in order to improve provision of public charging infrastructures. 

Several major automobile brands such as TATA Motors, Mahindra, Ola Electric etc. have begun their EV segments hence now able to offer a multitude of EV options to consumers. Since the commencement of this national scheme, the country has seen around 1,030,404 EV sales as of 7th October, 2023. The exploration of this essay lies in evaluating the extent to which the government intervention is attributable to this large increase in sales and demand of EVs in the country thus arriving at the research question, “To what extent has the FAME II Policy been effective in promoting the use of Electric Vehicles (EVs) in India”

This exploration becomes significant in order to evaluate what aspects of the policy were beneficial to the electric vehicle ecosystem in a sustainable manner while also identifying the non-responsive strands of the policy; in order to find out the future scope of this government intervention in order to make the market more efficient. Thus begging the question, “To what extent has the Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India - Phase 2 (FAME II) Policy been effective in promoting the use of Electric Vehicles (EVs) in India”

1.2 Methodology

In order to effectively evaluate the extent to which the implementation of the FAME II policy was able to generate demand for Electric Vehicles in India and correct the market failure arising from negative externalities of consumption of automobiles running on traditional energy sources I had to first understand the policy guidelines and goals. For which I made use of notifications and reports published on the FAME II Sub-Page on the Ministry of Heavy Industries website in order to grasp the policy goals and outline the exact subsidy and incentivisation amounts across segments.

I have narrowed the scope to the effects of the 2nd phase of FAME policy which is an improvement and extension upon the 1st phase commenced 2015. In order to track the trend of EV Registrations, I utilised reports from Society of Manufacturers of Electric Vehicles (SMEV) and verified the source as data from the National Vahan Dashboard run by the Ministry of Road Transport and Highways in order to ensure accuracy in EV sales figures and to confirm the trend over time. Furthermore, I made use of publications from JMK Research and Publications on data collected regarding complementary developments in the EV Industry such as the construction of EV Charging Infrastructure to support the demand for Electric Vehicles. JMK Research & Publication is a private research organisation that has had a positive record of supplying data to some of the major energy corporations of India such as Adani, Jio, TATA Power, and the Institute of Energy Economics and Financial Analysis (IEEFA)

I have also looked through state and government publications in order to identify other policy measures taken to promote EV registrations during the same time period. I have taken this into account in order to accurately evaluate the extent of the FAME II Policy exclusively in impacting consumer preferences for Electric Vehicles. 

I have not restricted my exploration of the effectiveness of the policy to a specific state or region due to the policy being aimed towards total national demand incentives across regions in India. Furthermore, as the 2nd phase of the policy was put into effect starting 2019 I have collected relevant sales and industry development data from 2017-YTD2023 to effectively evaluate the change in consumer patterns over time since the implementation of this policy. In order to most effectively analyse and evaluate the impact of the government intervention I conducted various quantitative and qualitative analyses to find the correlation between the intervention, the related benefits to the cost to the government as well as graphically represent the market situation with the subsidies provided.

1.3 Theoretical Foundation 

The overall demand for electric vehicles in the economy can be represented as a demand function of the determinants of demand that impact it. A demand function is of the form Qd=a-bP that can further be expanded to include the relevant determinants of demand that cause changes in the quantity demanded of electric vehicles. 

Merit goods are those goods that provide an external benefit to society from their consumption in the economy. As such, we can define electric vehicles as a form of merit good due to the positive externalities associated with their consumption by consumers. Electric vehicles do not contribute to greenhouse gas emissions. In this manner they are able to provide the external benefit of reducing greenhouse gas emissions and reducing noise pollution in the environment. However, despite these positive externalities arising from the consumption of electric vehicles, consumers are not consuming electric vehicles at the level of consumption that would be optimal from society’s perspective. There is a difference between the real usage of electric vehicles versus the socially optimal level of consumption leading to a potential to allocate resources more efficiently,. There are many barriers to electric vehicle adoption by consumers in India such as the high total cost of ownership, lack of charging infrastructure, as well as consumer awareness about the electric vehicle technology that stand in the way of the realisation of optimal welfare gain in the economy. 

These are the barriers that policymakers and the Government of India wish to break down through government intervention in order to boost demand and thus improve electric vehicle adoption rates in the country in order to function at a more environmentally sustainable level as well as an economically more efficient level for electric vehicles. Through the drafting and implementation of specifically the FAME-II Policy the government intervenes in the market in order to boost demand for and promote usage of electric vehicles, shift the demand curve to the right hence nudging the equilibrium point closer to the socially optimal level of consumption. To that extent it becomes essential to evaluate the relevant costs associated with providing the subsidies and demand incentives leading to the possible benefits enjoyed by the economy of reduced emissions, reduced noise, as well as other fiscal benefits achieved from a cleaner country. 

To provide demand incentives to commercial as well as end user consumers, the government has established an outlay of 822 Crore Rupees, 4522 Crore Rupees and 3187 Crore Rupees for each year respectively from 2019 to 2021. These subsidies are available to consumers through the form of a reduction in upfront purchase price for electric and hybrid vehicles in the country. The incentive will be offered on the basis of battery capacity of the purchased vehicle since battery costs are the largest factor contributing to the difference in price between EVs and ICE (Internal Combustion Engine) Vehicles. This way the government is able to generate demand for electric vehicles across different segments in the economy by reducing the cost of ownership for the consumers through these demand incentives.

In order to meet the increase in demand for electric vehicles that the Indian Government hopes and strives for, there is also a need to ensure that the supply in the economy is sufficient to satisfy all the demand that may arise through the parameters of the FAME-II scheme. Receiving subsidies would be heavily beneficial to these manufactures as they will be able to reduce their cost of production and hence supply a much greater quantity of electric two wheeler vehicles in the economy which would gradually cause overall supply in the economy to shift rightwards. Hence, with the hoped increase in demand supported with the increase in supply subsequently of electric vehicles the economy will be motivated to adopt the large quantity of electric vehicles available in the market at the low prices arising from demand incentives as well as subsidisation of electric vehicle manufacturing.

2. Economic Analysis and Results

2.1 Market Efficiency Analysis

Graph 1: Positive Externality of Consumption of Electric Vehicles represented by policy target

There is a positive externality of consumption in the case of electric vehicles hence from society’s point of view, electric vehicles are under consumed. Initially EVs were being supplied at the quantity Qc of 1.2 Lakh Units and price Pc. By incentivising the purchase of electric vehicles the government was able to achieve approximately 95% of its target of 15,62,000 e-vehicles in the economy represented by Qopt. There were a total of 14,97,190 unit sales of electric vehicles from 2020 until 31st December 2022 represented by Qm. The external benefit from the consumption of electric vehicles is not realised by producers, hence there is a potential to gain welfare represented by the darker triangle abc. By subsidising producers, the government is able to increase the supply of electric vehicles in the market brought about by the reduction in cost of production for the suppliers thus tapping into some of the potential welfare leading a smaller potential welfare gain triangle cde. Furthermore, demand incentives further reduce the cost of ownership for electric vehicles making it a much more attractive option than traditional fuel engine cars leading to a market shift from diesel and petrol cars to electric. The above diagram portrays this scenario where Qopt signifies the targets set by the Ministry of Heavy Industries while Qc is the quantity demanded by society before the scheme was put into effect. Due to the subsidies and demand incentives provided, supply shifts rightwards resulting in lower price hence lower cost to consumers and thus through the law of demand the market finds itself operating at a higher level of quantity at Qm closer to the socially optimal level of output. It can thus be inferred that resources are being allocated more efficiently from society’s point of view after the implementation of the FAME-II Scheme.

2.2 Correlation Analysis

In order to accurately explore the extent to which various economic factors contributed to the increase in EV sales, we must carry out a correlation analysis based on the data collected regarding various determinants of EV demand. It is a statistical tool used to determine the relation between dependent variable(s) and an independent variable. For EV demand, the independent variables will be determined as follows. Firstly, government expenditure is an essential factor that must be considered when determining the impact of the FAME-II scheme in generating electric demand. A look at the FAME scheme fund utilisation by the industry was taken in order to compute the correlation to the sales trend. Furthermore, it was also essential to take into account the number of EV models introduced in the market during the time period of the scheme as well as the number of public charging stations installed and sanctioned by the Ministry of Heavy Industries in order to facilitate the growth of the electric vehicle ecosystem. The number of EV models determines the amount of choice available to potential consumers in the automobile market whereas charging stations can be perceived as a complementary good whose availability will determine consumer confidence on electric vehicles. While these 3 independent variables are considered to explore the correlation, we are assuming all other determinants as constant during the relevant time period for 2020-2023 to accurately explore the impact of the FAME-II scheme on the increase in EV sales over the recent years. Consideration of these three independent variables causes my demand function to take the form, Yd=a+1x1+2x2+3x3, where represents my correlation coefficients for each independent variable defined by x. Tabulating all the relevant data results in the following:

Table 1: EV Unit sales data, government scheme fund utilisation in INR crore, unit charging stations installed, unit number of electric vehicle models introduced in the market.

Running a data correlation analysis on the above table resulted in the following correlation output:

Table 2: Correlation calculation between the determinants of demand identified and EV Sales.

The above table reflects the correlation between the identified independent variables i.e. determinants of demand for electric vehicles in India related to the implementation of the FAME-II scheme. All three independent variables display a high positive correlation between the increase in EV sales and the variables with the coefficients being 0.86, 0.99 and 0.78 respectively for government allocated fund utilisation, number of charging stations installed across the country and number of models introduced in each year for the 4 year time span considered when FAME-II was in effect. 

The positive correlation between government fund utilisation and electric vehicle sales reflected by the high correlation coefficient of 0.86 suggests a strong positive correlation. This indicated that as the government expenditure in the electric vehicle industry increases, perhaps to further subsidies producers, increase demand incentives and other promotional activities to generate demand will lead to substantial increase in electric vehicle sales.

Consequently, the extremely high correlation of 0.99 between the availability of charging stations and electric vehicle sales suggests consumer confidence and demand is significantly driven by the number of charging stations available and thus a more proportionate charger to electric vehicle ratio. Such a high correlation suggests that increases in public charging station availability will be almost perfectly mirrored by a corresponding increase in electric vehicle sales. 

Furthermore, while the number of electric vehicle models introduced have a strong linear positive correlation with the electric vehicle sales of 0.785, it is not as extreme as the impact of charging station availability. Regardless, it is still associated with a significant impact on the variations in electric vehicle sales in the economy. 

Although, for this exploration in order to accurately measure the impact of FAME-II’s implementation on the sales of electric vehicles three variables are taken into consideration with all the other assumed constant, there may be other determinants working in conjunction with these variables that aided the substantial increase in electric vehicle sales over the recent years. 

2.3 Cost-Benefit Analysis

Table 3: Total CO2 emissions (in tonnes) reduced due to electric vehicle adoption

In order to understand both the costs as well as benefits of the FAME-II policy in implementation in the economy we must conduct an assumptive quantitative study of the amount of CO2 that is going to be saved due to the rise in EV sales that has occurred recently. It is important to first collect data on the number of internal combustion engine vehicles sold which can be computed by subtracting EV sales from total automobile sales in the industry. Furthermore, in order to accurately find the economic impact of the policy we are taking a consistent CO2 emissions figure for each of the major automobile type due to their varying emissions and computing what the change in CO2 emissions annually would be that is extracted from the government’s carbon emissions calculator. With the figures for approximate CO2 emissions annually for an ICE and EV vehicle annually with a daily travel frequency averaging at 40km journeys we find the total reduction in CO2 emissions that arose due to the rise in EV demand and sales which otherwise would have been satisfied with traditional combustion engine vehicles.

The costs to the government are identified as the funds utilised by the electric vehicle industry in subsidising production, providing demand incentives and promoting electric vehicles. The corresponding benefits are identified as the fall in the calculated fall in CO2 emissions represented as a monetary value of the social cost of carbon emissions at $86 per tonne. The carbon cost is applied to the CO2 emission savings observed in the above tabular calculations and converted into INR for a consistent comparison between the fund allocation utilised from FAME-II and the fall in CO2 emissions represented in monetary terms of its social cost.

Table 4: Costs and Benefits from the FAME-II Policy (in INR Crore)

With the total costs of 5,228 INR Crore allocated across the three segments to provide demand incentives as on 1st December, 2023, we can note the respective benefits attained by the corresponding hike in EV sales for each segment and thus the reduction in CO2 emissions by the vehicles in the economy.

When interpreting the results of the cost-benefit analysis it is important to ensure that the electric vehicle industry is in an infant stage where the FAME-II scheme acts as a nudge to boost demand and shift the automobile ecosystem in the long run. India is a country that has been heavily dependent on fossil fuels for its energy requirements, thus the FAME-II scheme acts as a catalyst to change consumer perception towards renewable energy sources. This reflects the significant difference between the monetary costs and monetary benefits enjoyed by the economy. Yes, India is investing heavily in promoting demand for electric vehicles but only experiencing a marginal level of benefit in the very short term of the policy by terms of CO2 reduction but with the change in consumer perception and preferences that will be brought out, a shift towards efficiency is expected in the long run.

3.1 Evaluation

The FAME-II scheme seeks to not just increase EV sales but instead to generate demand and promote the usage of these electric vehicles. To that extent, its goal also becomes to reduce the dependence on fossil fuels that harm the environment. Over and above the benefits experienced by the electric vehicle industry, the FAME-II scheme also acts as an outlet for government investment in other areas as well such as the investment on improving battery technology, the multitude of schemes sanctioned in the renewable energy sector. A growth and success in the EV industry signals to both producers and consumers of the changing energy ecosystem of energy thus promoting a shift to renewable sources of energy in both automobiles and other industrial applications. This further also invites Foreign Direct Investment (FDI) from clean energy companies abroad in order to support the national clean energy goals. Additionally, it paves the way for future policy measures to be effective in the electric vehicle industry following the success of the FAME-II scheme as seen by the policy target achievement, heavy impact of government investment on charging infrastructure, subsidising producers and incentivising consumers on the hike in EV sales over the last five years. 

Alternatively, we must also take a look at the consequences of an increase in EV sales in the country. The wrongful disposal of electric vehicle batteries has severe health and environmental implications. Disposing these lithium-ion batteries in landfills or subjecting them to incineration leads to the release of highly toxic fumes that enters the atmosphere and deteriorates human health. In order to consider these implications, the Extended Producer Responsibility (EPR) laws dictate that all waste batteries must be collected and sent for recycling by producers. The compliance of this law brings up further costs for producers that may act as a limitation for increased electric vehicle supply productivity. However, it is also not possible for the government to make the laws lax or completely abolish them due to the counterproductive nature of the notion. Additionally, India being a country whose energy requirements are met more than 80% by fossil fuels, hence often electricity generation arises from polluting processes involving usage of fossil fuels. If electric cars are charged with electricity that is generated through fossil fuels then the benefits of EV are diminished since fossil fuel dependence would increase with the rise in EV sales. Furthermore, it can be argued that the FAME-II scheme is seeing little benefit for a large amount of government expenditure that has a large opportunity cost to be invested into key development projects or even other renewable energy schemes. In conjunction with this it also essential to consider the impact on the fiscal deficit of 6.4% observed in 2022-23. This has a variety of implications on the government debt, borrowing costs for private investment and overall economic growth in the long run which leads to scepticism for the large amount of government expenditure on FAME-II and other clean energy government measures.

3.2 Conclusion

The FAME-II scheme was extremely beneficial in providing momentum to the electric vehicle industry and promoting the usage of this alternative mode of transportation in order to realise the potential welfare that can be gained by society. It aids in the change of perception of consumers about electric vehicles and establishes EVs as a competing good in the automobile market. Although, the monetary benefits are marginal compared to the heavy costs put in, due to the nature of the scheme the many benefits from the scheme will be enjoyed in the long run as more players enter the market, supply increases, both monetary and external benefits of electric vehicles will become known given that the government consistently strives to promote the use of electric vehicles even after the suspension of FAME.

3.3 Limitations

The FAME-II scheme commenced April 2019 which made it challenging to find all the data necessary for this exploration. Furthermore, the full range of future implications are more difficult to consider as the scheme period is still going on. Additionally in order to find the correlation between the government intervention and the change in EV sales we have had to assume other determinants of demand as constant such as the income levels of consumers, changing consumer trends and preferences and have assumed rational consumer behaviour which may not stand fully reflective of the reality of the scheme’s performance.

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