From incentives to adoption: A decadal review of India's EV subsidy effectiveness

India is committed to reducing the emissions intensity of its GDP by 45% by 2030 from 2005 levels, and achieving net zero emissions by 2070, as part of its Nationally Determined Contributions under the Paris Agreement. Achieving these goals requires a fundamental shift across sectors, with the transportation sector—accounting for approximately 14% of India’s energy sector carbon dioxide emissions—being critical for decarbonisation. At the same time, India is positioning itself as a global hub for electric vehicle (EV) manufacturing, aiming to harness domestic scale to drive industrial growth, reduce import dependence and create green jobs.

To drive this transformation, India has introduced a wide range of policies, such as purchase subsidies, production-linked incentives and regulatory mandates, to promote the uptake of EVs. Electrifying mobility can curb emissions, reduce fossil fuel dependence and improve air quality. Reflecting this ambition, the Indian government aims to increase the share of EV sales to 30% in private cars, 70% in commercial vehicles, 40% in buses and 80% in two- and three-wheelers by 2030.

However, despite ambitious goals, the EV industry continues to face challenges, such as high upfront costs, expensive financing, a nascent domestic battery supply chain, limited charging infrastructure and the absence of national EV sales targets. The central and state governments have implemented various fiscal and non-fiscal support measures, earmarking substantial funds to catalyse market growth. Yet, a crucial question remains largely unanswered: how effective are these government interventions in driving EV adoption across vehicle segments?

In this study, we provide the first comprehensive empirical assessment of India’s EV fiscal support policies, examining their effectiveness across major vehicle categories. Our analysis spans a decade (2014-23) and offers insights into how fiscal incentives and other government policies influence EV market uptake. We employ advanced econometric techniques, including difference-in-differences and synthetic control methods, to establish causal relationships between policy interventions and market outcomes. We summarise our key findings below:

Electric two-wheelers (E2Ws): The introduction of higher subsidies under Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in India-II (FAME-II) significantly increased E2W sales, with a 12.7% jump in sales for every one-standard-deviation increase in subsidy intensity. The analysis revealed a potential maximum market multiplier effect of up to 9×, where approximately 1.63 lakh E2Ws directly attributable to FAME-II subsidies contributed to total sales, reaching 14.4 lakh units during the policy period. State incentives further amplified this growth, with our analysis showing states implementing supportive policies achieved 54.5% higher E2W sales compared to those with only central policies. However, the adoption rate—the share of E2W sales in total 2W sales—remained a modest 4% at the end of 2023. While central and state policies have been effective in driving absolute sales growth, they have had limited success in increasing market share due to barriers, such as entrenched consumer preference for internal combustion engines (ICEs), inadequate charging infrastructure, and concerns over residual value. 

Electric three-wheeler passenger (E3WP): FAME-I played a pivotal role in catalysing the E3WP market, with a significant multiplier effect on sales. Our statistical analysis indicates that approximately 27,000 additional E3WPs can be directly attributed to FAME-I subsidies, while actual sales reached 2.67 lakh units by March 2019, suggesting a multiplier ratio of up to 10×. For every E3WP statistically linked to subsidy intensity, up to 10 units materialised in actual sales. However, the transition to FAME-II had a limited direct impact on sales, indicating that the segment had matured beyond reliance on subsidies. Our study suggests that market-led expansion is now the primary driver of E3WP growth, supported by factors like favourable total cost of ownership (TCO) and local regulatory measures.

Electric three-wheeler cargo (E3WC): Despite weak statistical evidence for direct (central) subsidy impact, the E3WC segment has grown substantially, driven by operational cost advantages. Our regression analysis reveals that for every 1% decrease in operating costs relative to ICE vehicles, E3WC sales increased by 0.563% while adoption rates rose by 0.167%. This operational efficiency has helped transform the segment from virtually non-existent (0.03% market share) in 2015 to capturing nearly one-third of the market (31.04%) by 2023. States implementing supporting policies recorded 30.1% higher sales and 8.4 percentage points higher adoption rates than those without such policies. Our panel regression further demonstrates that a one standard deviation increase in state subsidy intensity leads to a 46.16% increase in E3WC sales and a 9.26 percentage point increase in adoption rate. This underscores the importance of state policies in complementing central initiatives, particularly in bridging cost gaps for vehicle categories with higher prices due to bigger batteries.

Electric four-wheeler (commercial) (E4WC): FAME-II and Production Linked Incentives contributed significantly to the growth of the E4WC segment, with a substantial increase in sales and a modest improvement in adoption rates. States implementing supporting policies also witnessed 211% higher sales growth compared with states that did not provide purchase incentives. However, maintaining a minimum subsidy threshold to offset high upfront costs and focusing on supply-side interventions are essential to ward off competition from ICE vehicles, especially the compressed natural gas (CNG) vehicles in this segment.

Electric buses (e-buses): Despite substantial subsidies under both FAME-I (up to Rs4.1 million per bus) and FAME-II (Rs20,000/kWh, capped at 40% of ex-showroom price), e-bus adoption remained modest with 4,766 units subsidised against a target of 7,262. Our analysis found no statistically significant positive effect of any central or state policy on e-bus sales or adoption rates. This underperformance stemmed from several structural limitations: procurement was restricted to state transport undertakings (STUs), which represent less than 7% of India's bus fleet; tender-based aggregated demand mechanisms failed to stimulate organic market growth; e-buses remained 2-3 times more expensive than diesel alternatives despite subsidies; and smaller private operators, who make up the majority of the sector, struggled to access suitable financing.

These findings have significant implications for policymakers transitioning from FAME schemes to newer initiatives, such as PM E-DRIVE. 

First, the next phase of policy support must extend beyond purchase subsidies to encompass robust charging infrastructure and accessible low-cost financing. Second, the differing maturity levels of each EV segment call for more nuanced strategies, blending demand- and supply-side options to tackle specific cost or regulatory bottlenecks. Third, strong coordination between central and state policies can amplify results, especially for segments still grappling with affordability. 

Finally, as central subsidies taper, states will play a growing role in driving adoption through fiscal and non-fiscal measures. However, given their limited revenue and reliance on central transfers, their capacity to sustain fiscal support is constrained. To ensure balanced and sustained progress, the central government must continue to anchor fiscal support, given its stronger resource base, while states can play a catalytic role through targeted fiscal and non-fiscal measures and by facilitating access to affordable finance through support to Non-Banking Financial Companies (NBFCs) and localised credit instruments. 

While India has made significant strides in promoting EV adoption through its policies, achieving deeper market penetration will require a combination of sustained financial incentives, infrastructure development, accessible low-cost finance and regulatory innovation. This study provides valuable insights to inform future policy decisions that can accelerate the transition to electric mobility and decarbonise the transportation sector.