- The government is turning up heat on manufacturers importing parts from China while claiming subsidies. But can a hard line choke the sector?
NEW DELHI : The emails started coming in April. Close to a dozen of them have been written, thus far.
The whistleblower, who calls himself ‘Akash Shah, CA and CFA’, wrote to the department of heavy industries, the ministry in charge of implementing the government’s FAME-II scheme, alleging several violations by electric vehicle (EV) manufacturers who are mandated to meet certain localization norms but did not.
These companies, he alleged, have been directly or indirectly importing key vehicle parts, mostly from China. They are supposed to make or assemble them in India to be eligible for hefty subsidies.
FAME, or Faster Adoption and Manufacturing of Electric vehicles, came about to bridge the gap between the prices of traditional internal combustion vehicles and EVs. FAME-II, which commenced from April 2019, offers demand sops—upfront cash discounts on the purchase of an EV for customers, up to 40% of the cost of the vehicle. The original equipment manufacturer (OEM) claims this discount given to customers from the government by raising bills every month. The OEM benefits because lower showroom prices lead to higher sales.
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Shah’s first email in April urged the heavy industries ministry to initiate an inquiry into the “fraudulent” subsidy claims made by Hero Electric and called for suspending the electric scooter maker from the FAME-II scheme till a detailed inquiry was conducted.
The latest email came as recently as late September. “… The eligibility certification from ARAI and ICAT, subsidy claims and the disbursement process in the FAME-II scheme, is severely compromised. It is a complete mockery of the phased manufacturing plan norms laid out by the department of heavy industries that a simple undertaking submitted by an electric vehicle manufacturer to ARAI/ICAT is considered genuinely Made-in-India,” the mail alleged.
The Automotive Research Association of India (ARAI) is an automotive testing body. The International Centre for Automotive Technology (ICAT) is a body that provides various automotive-related services. They are both affiliated with the ministry of heavy industries and issue eligibility certificates to manufacturers for each vehicle model they want to claim the FAME-II subsidy for.
Nearly two-dozen electric two-wheeler makers currently avail benefits under the FAME-II scheme. But Shah’s emails point to just four companies who allegedly violated the norms. Apart from Hero Electric, Shah’s subsequent emails named Okinawa Autotech, Ampere Vehicles, and Benling India.
Shah copied the emails he sent to ARAI, ICAT, journalists, the Comptroller and Auditor General of India, the roads ministry, leaders of the ruling dispensation in the Bharatiya Janata Party (BJP) as well as opposition leaders. This set in motion a chain of events.
The FAME-II scheme’s phased manufacturing plan requires that a list of 18 critical components used in the making of EVs are manufactured or assembled locally. These include the battery pack, traction motor and controller, vehicle control unit, on-board charger and instrument panel among others.
The “evidence” cited by Shah in his emails underlined many violations here.
Subsidies for Hero Electric and Okinawa Autotech have now been frozen. According to the government’s FAME-II portal, the status of the incentives on offer for various high-speed models that the two brands sell in the market has “expired”. For Benling, however, subsidies are still active on three electric-scooter models it sells. Subsidies for Ampere’s models are active, too.
While Hero Electric did not respond to a clarification sought from Mint, Okinawa said it was compliant with the rules. “At Okinawa Autotech, we have been following the FAME-II guidelines in the past and we adhere to all the guidelines that are notified by the government. We would like to clarify that this is an industry-wide development and not limited to our brand. The subsidy has not been disbursed to all EV players across due to the portal going under an upgradation process. Furthermore, ARAI conducted routine audits in Okinawa where we provided all the relevant data to the government and the outcome has been satisfactory,” a spokesperson from Okinawa told Mint.
Mails sent to Benling seeking clarifications did not elicit a respose.
But like they say, there is no smoke without a fire. While Shah’s emails could have been a starting point, the government had already begun cracking down on errant manufacturers.
“You have signed an undertaking that you will make in India. Are you not supposed to follow through?” Arun Goel, secretary at the department of heavy industries, asks. “If you talk to all the OEMs who have products eligible for FAME-II subsidies, they will tell you the rules were absolutely clear. The majority of the industry is also obeying the localization rules. Those who did not are suffering and are talking about ambiguities,” he adds.
“There are conditions in any government scheme for getting a pay-out. The government is supposed to check this–that’s what we are doing,” Goel further says.
Acting on complaints, the government got its technical teams to evaluate. Spot visits at some factories corroborated the allegations. Subsidies were subsequently withheld from companies making incorrect claims. “If they (the OEMs) are able to convince the technical teams that the vehicle parts are actually made in India, the subsidy will be released,” Goel, who did not mention any company, says.
Long before the department of heavy industries got into the act, the Department of Revenue Intelligence had begun a crackdown in 2020. In a showcase notice issued in 2020, it slapped penalties on Hero Electric for circular routing of key vehicle components brought in from China, and wrongful declaration—completely knocked down kits (CKD) were imported into India but declared only as “parts” at various ports to evade customs duty, the notice alleged. CKD kits attract a higher import duty than individual vehicle parts. Hero Electric appealed against the notice.
Imports come in three forms. One, as a completely built-up unit where the whole vehicle is imported. Second, as a semi-knocked down unit, where some assembly operations are needed in the domestic factory. Third is the CKD unit, where parts of a vehicle are assembled locally.
‘Where is supply chain?’
The government, meanwhile, believes that it gave the EV industry a long rope. The domestic supply chain wasn’t primed for catering to large-scale localization of many critical EV components when the scheme was notified four years ago. Also, the government did not want to impose norms with an iron hand in the first few years as it would have risked slowing down a new ecosystem.
Even after four years, the supply chain isn’t ready, some companies say.
Sources in Hero Electric acknowledge there is a “difference of opinion with the government” about whether they wilfully violated the phased manufacturing plan guidelines. “When we had to get our re-certifications done for FAME-II, we were in a rush, along with the rest of the industry. We got certification for a sample product. At the same time, we went to the government and said where is the supply chain?” an executive from Hero Electric, who didn’t want to be identified, says. “Most components like motor controllers, chargers come from outside. Unless suppliers invest, localization isn’t possible.”
The executive cited the example of batteries. Battery packs used in electric two-wheelers claiming the FAME-II subsidy must be assembled in India. The rules allow for the import of Li-ion cells and the battery management system, but not a fully assembled battery.
“None of the large battery players have been able to set up enough capacity. But, because we are a large volume player, we are footing the bill of the government crackdown,” the executive adds.
Difficulty of finding out
All EV manufacturers claiming subsidies need regular certifications for the vehicles they sell. When the pandemic hit in March 2020, the government allowed an extension of their older certificates by a few months.
According to sources, some OEMs assumed that the validity of their old certifications were forever—they did not apply for re-certification. Meanwhile, the supply-chain bottlenecks post the covid-19 lockdowns meant that manufacturers had problems meeting the localization norms they earlier believed they could manage.
However, ARAI executives say that these companies should have approached the testing agency for clarification.
“How can we know what has happened between one certification and the next stage? An OEM submits an undertaking and is certified for certain products. Later, if they find that the standards or specifications were not possible to comply with, they should have come back to us seeking an exemption,” a senior executive from ARAI, who didn’t want to be identified, says.
ARAI is still working with the government to investigate complaints against certain OEMs to figure out if they have flouted localization rules, he adds.
The executive also acknowledges the difficulty and limitation the organization faces.
“It is not so straightforward. It is going to be very difficult for us to understand which part goes into a scooter that is high-speed (and claims subsidies) and which one goes into a vehicle which doesn’t enlist for subsidies. The nomenclature of parts is also very similar. We are not trained for this sort of analysis, and it is not even expected out of an agency like ours,” the official says.
Both Hero Electric and Okinawa sell low-speed two-wheeler models as well where FAME-II subsidies are not applicable.
In the meantime, the government appears to be strengthening its vigilance mechanism. From 1 October, it has put in place a “faceless” method of capturing phased manufacturing plan and domestic value addition data from OEMs by linking their enterprise resource planning (ERP) software to the government’s application programming interface.
The domestic value addition data will be captured for the disbursement of incentives under the automotive production-linked incentive (PLI) scheme, while the phased manufacturing plan data will be captured for FAME-II disbursals.
“We are implementing this automated system for FAME-II—a human interface can sometimes be used as an excuse for error,” secretary Goel says.
“We are asking only domestic value addition information, not anything else. Here, you have to speak the truth and most people do. We are not asking companies to disclose anything that is sensitive to their business. We don’t want to intrude on their business or privacy,” Goel adds.
Leading domestic OEMs, however, question if the government imposing new rules is fair since honest players have been investing significant capital in building the local supply chain.
“Now, the government has set up a huge architecture where everybody has to report all kinds of data. We do have an ERP system and we can keep reporting the data. But the fact is that’s not the solution,” a senior executive at a leading two-wheeler OEM says. He didn’t want to be identified. “The solution is to first finish the investigation process and take action against the parties not following the rules and prosecute them,” he adds.
OEMs are investing much more than the subsidies they receive from the government, the executive holds. “We are investing in plant machinery, product development and in creating technology. We are investing in vendors, who also invest based on our word. The government needs to be sensitive to this process,” he concludes.
The government, therefore, has to walk a tightrope, between tighter regulation that can choke investments and product development, and lighter regulation that encourages the nascent industry to press the accelerator on volumes. After all, India’s transition to the green is at stake.
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