What a government audit found in India’s EV subsidy scheme?

**Akshara** (0:04)
In today's episode, we will do one deep dive and cover another story for the day. First, we'll talk about what a government audit found in India's EV subsidy scheme. And then we'll talk about why fragrance companies are under investigation.
Welcome back to The Daily Brief by Zerodha where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Tuesday, 1st September. Coming to the first story.
So in 2015, 0.08% of vehicle registrations in India were electric vehicles. By 2023-24, that had risen to 6.82%.
Now, there are many reasons for that jump, but FAME, which is one of the government's main EV schemes, would certainly have helped. It paid manufacturers a cash incentive for every eligible EV sold, bringing the price down for buyers.
So, FAME started small in 2015
FAME 2 followed in 2019 and ran until 2024, with Rs 11,500 crore allocated to it. So, the scheme was not just about making EVs cheaper. It also funded public charging stations and EV research, while requiring manufacturers to gradually replace imported parts with locally made ones to remain eligible for subsidies. But it didn't work quite as smoothly as those headline numbers suggest. The Comptroller and Auditor General, or CAG, which is the government's official auditor, recently reviewed 9 years of the scheme and found plenty of problems with how FAME was run. Now, when FAME 2 was designed, the government had to guess which EVs Indians would buy, and it got that mix wrong. Of the approximately Rs 8,600 crore set aside for vehicle incentives, Rs 2,000 crore went to 2-wheelers, Rs 2,500 crore to 3-wheelers, approximately Rs 550 crore to 4-wheelers, and approximately Rs 3,550 crore to electric buses.
By March 2023, 2-wheelers had already used 127% of their allocation. 3-wheelers had used just 16% and 4-wheelers 28%.
So in May 2023, the government moved the money around. 2-wheeler funding rose 75%, while allocations for 3-wheelers and 4-wheelers were cut by 72% and 54% respectively. The ministry said that this was not simply because Indians preferred scooters over cars. The weak demand and limited charging infrastructure had held back 3-wheelers and 4-wheelers, while 2-wheelers had already taken off. So the CAG agreed with the shift. But it said that the original estimates were unrealistic, given how much money had to be moved so late in the scheme. And the 3-wheeler target makes the point. FAME 2 originally aimed to subsidize 5 lakh vehicles, and then cut that target to about 1.55 lakh. It eventually subsidized roughly 1.65 lakh, which the government called 106% achievement. Against the original target, it was closer to 33%.
Now, FAME 2 was not just meant to get more people to buy EVs. It was also meant to build an EV manufacturing industry in India. Under its phased manufacturing program, companies had to gradually replace imported parts with locally made ones, and these included the onboard charger, hub motor, and motor controller. Now, to receive an incentive, a manufacturer had to get a sample vehicle tested and certified, then promise that all vehicles sold under FAME would continue meeting these localization rules. But that promise was where the problem began.
Once a company was certified and started receiving incentives, there was no regular system to check whether the vehicles it was selling still met the rules. Manufacturers were meant to renew their eligibility certification periodically, but the government largely relied on them to report their own compliance.
And the issue emerged only after complaints that some manufacturers were violating the rules. Testing agencies then examined company records, inspected factories, and took vehicles apart to check whether the parts were actually made in India.
They found that five manufacturers were still importing parts that should have been made locally. And these companies had also failed to renew their annual certification. Now the CAG doesn't say how many manufacturers were examined in total, but only that these five had collected rupees 468 crore in incentives despite the violations. Two have since returned rupees 190 crore, including interest, but the other three still owe rupees 278 crore. So the ministry ordered them to deregister, barred them from its scheme for two years, and referred the case to the Serious Fraud Investigation Office. Now, the report doesn't name the five manufacturers, and we couldn't independently confirm their identities. But the ministry says PME Drive, which replaced fame, has tightened the process. So testing agencies must now randomly pick vehicles from customers or factories each year, take them apart, and verify whether the required parts are made in India. Now, a separate issue exposed another weakness. To qualify for the subsidy, an electric two-wheeler could not have an X factory price above Rs 1.5 lakh. And three manufacturers got around this by leaving the on-board charger out of the listed price and selling it separately as an accessory. But the charger was not optional. It was a mandatory part and one that also had to be made in India. Selling it separately kept the official vehicle price below Rs 1.5 lakh, allowing the models to qualify for subsidies. The government paid Rs 1,420 crore in incentives on them. So the ministry asked manufacturers to refund customers for the separately sold chargers. But the CAG said that didn't fix the main problem. Had the charger been included in the vehicle's price from the start, many models would have crossed the Rs 1.5 lakh limit and not qualified for the subsidy. And we also found reports from 2023 of a similar issue. Polar Electric, TVS Motor, Aether Energy, and Hero Motor Corp had separately charged customers for chargers on electric scooters. But after the ministry intervened, all four agreed to refund the cost, amounting to a few hundred crore rupees. Now, both the localization violations and the charger issue were caught only after incentives had been paid. Ideally, they should have been flagged while claims were processed, and that was partly the job of the online portal used to process and track incentive payments. But the CAG found serious problems with the portal itself. So for Fame 1, which ran from 2015-16 to 2018-19, the CAG compared records from the portal, its underlying database, and the ministry's physical files. And all three should have matched. But instead, each showed a different number. Now, the portal home page showed approximately Rs. 356 crore claimed. Another section showed just approximately Rs. 200 crore. And the raw data behind the portal showed an even stranger figure, negative Rs. 423 crore. Now, the ministry's physical files had yet another number, Rs. 321 crore. But they didn't contain individual vehicle details, so the CAG could not cross-check the claims. And there were four different sets of numbers for the same scheme. So, with no reliable record to fall back on, the CAG said it could not verify whether FAME 1 incentives were correct or even valid. So, for FAME 2, the ministry built a new portal with the same vendor that had built the troubled FAME 1 portal, even though it had not figured out what went wrong earlier. And the new portal had different problems. It accepted claims with invoice dates from 2027, 2044, and even 2088, decades after the scheme was meant to end, as well as dates from 1975 and 1990, before FAME even existed. It also accepted duplicate vehicle registration numbers and paid some duplicate claims. And for much of FAME 2, the portal was not directly linked to VAHAN, which is the government's vehicle registration database. Officials instead had to manually compare Excel files to check whether subsidy claims matched registration records. So for years, a scheme handling thousands of crores relied on manual checks for something as basic as whether a subsidy claim was genuine. So far, the problems were with incentives paid on EVs. But FAME was also meant to build a charging network those vehicles needed. Even here, it fell far behind plan.