After almost trebling to 7.3 lakh units¹ last fiscal, volume growth of electric two-wheelers (e2Ws) is set to slow to ~25% this fiscal following the recent reduction of subsidy under the FAME-II scheme and consequent price hikes in existing models.

The good part is, e2W manufacturers are adapting to the new subsidy regime by optimising their product portfolio by launching more affordable variants with lower battery sizes.

Over the medium-term, penetration of e2Ws will be accelerated by favourable total cost of ownership (TCO), expected reduction in the initial acquisition cost due to economies of scale and increased localisation of components.

Effective June 1, 2023, the FAME II subsidy was reduced to Rs 10,000 per kWh of battery with a cap of 15% of the ex-factory price compared with Rs 15,000 and 40%, respectively, earlier. As a result, the subsidy for a high-end two-wheeler with battery of 4 kWh and ex-factory price of Rs 1.5 lakh (including subsidy) has more than halved from Rs 60,000 per unit to Rs 22,500/unit.

Manufacturers have passed on the subsidy cut to customers through price hikes of up to 15-20% across existing models, making the upfront cost of e2Ws even higher compared with the conventional petrol-driven ones.

As a result, new e2W registrations fell from ~67,000 units in April 2023 and its peak of ~105,000 units in May 2023 - led by pre-buying prior to the subsidy slicing - to a 12-month low of ~46,000 units in June.

But volumes have seen a progressive uptick in the second quarter with monthly average of ~60,200, in line with the monthly average of ~60,500 seen in fiscal 2023. This translates to a 36% on year growth for the first half of this fiscal boosted by the one-off surge in May.

Says Naveen Vaidyanathan, Director, CRISIL Ratings Limited, “Despite the subsidy cut, industry growth continues to be supported by fundamentally favourable economics for e2Ws. The total cost of ownership is estimated to be ~20% lower for e2Ws compared with petrol variants even under the current subsidy regime, as against ~32% lower under the earlier subsidy regime². The average running cost of 25-30 paise per km compared with Rs 2-2.25 per km³ for a petrol vehicle makes a difference over the life of the two-wheeler.”

Moreover, the top four manufacturers, with volume market share of ~70% for fiscal 2024 till date, have increasingly introduced models in recent months with lower battery sizes of 2-3 kWh and certified range of 90-110 km. While smaller batteries can lead to lower range per charge, it will remain adequate for intra-city commute as an average daily distance of less than 30 km is covered by a commuter in India. Also, despite lower battery sizes, the performance is largely maintained in terms of top speed and power. Further, e2Ws have limited dependence on public infrastructure as these are generally charged at home.

Says Pushan Sharma, Director, CRISIL Market Intelligence and Analytics, “Newer models will enhance affordability by lowering the upfront cost by 10-15%. These steps by e2W manufacturers, along with the expected festive-season spurt, would support growth in second half, albeit on a high base, leading to an overall ~25% growth in e2Ws this fiscal.”

This will translate into a modest increase in e2W penetration to ~5.3% of the overall 2W market for fiscal 2024 against ~4.5% in fiscal 2023 and less than 2% in fiscal 2022.

Despite the speed bump this fiscal, the growth trajectory and penetration of e2Ws is expected to accelerate over the medium term. This would be driven by increasingly favourable TCO with expected reduction in the initial cost of acquisition due to economies of scale, increased localisation of components including batteries (comprising 40-45% of overall cost) supported by government policies such as the Production-Linked Incentive scheme. Internal Combustion Engine (ICE)-based vehicle makers are also increasingly launching e-2Ws and curtailing capex on ICE vehicles.

In the road ahead, regulations, government support with the upcoming sunset of the FAME-II scheme, and technological evolution will bear watching.

¹ Registration data for electric two wheelers including monthly volumes as per www.vahan.parivahan.gov.in.
² TCO is calculated basis assumption of 7500km of annual distance covered, battery replacement cost and vehicle life of 7 years
³ Assuming current petrol prices at Rs 97/litre in Delhi