India is paying for subsidies without knowing what they deliver

Even the larger FAME-II (Faster Adoption and Manufacture of Electric Vehicles) scheme, which ended in 2024, spent a total of ₹8,844 crore, including ₹6,577 crore for subsidies, with the balance for capital assets and other expenses out of a cumulative ₹11,500 crore allocation over its lifespan.

But even this modest pie has multiple claimants with differing views on what deserves a subsidy. The latest to stir the pot is industry body Associated Chambers of Commerce and Industry of India (Assocham), which has written to the Ministry of Heavy Industry (which administers electric mobility subsidies) to consider giving tax parity with electric vehicles (EVs) to range-extended electric vehicles (REEVs). REEVs have a small onboard internal combustion motor to recharge the vehicle’s batteries, thus extending their range.

According to a Mint report, Assocham has argued that treating REEVs as hybrids, which attract higher excise duty than EVs, would inflate their price and disincentivize manufacturers and buyers. The current GST classification recognizes EVs and hybrids but not REEVs, which are not present in the Indian market as of now.

This adds a layer to the ongoing battle between hybrid and EV manufacturers. Makers of hybrid vehicles, like Toyota and Maruti Suzuki, want customer prices reduced through a combination of lower taxes, buyer subsidies, and reductions or waivers of government registration and other charges. But vehicle makers like Tata Motors and Mahindra, who have made big bets on pure EVs, have opposed this.

A deeper problem

The controversy starkly exposes a fundamental flaw in the government’s policy approach to subsidies – a lack of clear goal-setting and, worse, a failure to have measurable milestones in place for taxpayer-funded subsidies.

Take EV subsidies. Why subsidize EVs? If the answer is to reduce pollution, the automatic follow-up is: by how much, and by when? For starters, if the ultimate goal is to reduce pollution, or at least vehicular emissions, then why not subsidize all technologies that reduce or eliminate particulate pollution and greenhouse gas emissions, graded by how much carbon reduction they achieve?

EVs reduce vehicle-emission pollution where they operate, but some of it is simply transferred elsewhere, where fossil fuels are burned to generate the electricity needed to charge them.

There are also no measurable goals or periodic reviews to assess progress and adjust accordingly. For instance, there is no data showing how much carbon reduction per rupee the EV subsidies have achieved. FAME-I and II had sunset clauses, but many subsidy programmes don’t. Policy coherence is also lacking on multiple fronts.

For instance, subsidies exist for clean and renewable energy, yet the budget continues to carry the burden of past fuel subsidies via oil bonds issued earlier, as well as LPG subsidies. India runs the world’s largest food assistance programme through free and subsidized staples, yet there is no attempt to measure its impact on hunger or malnutrition.

Lack of monitoring and follow-up also means our subsidy programmes are often plagued by poor targeting and leakage. India’s automobile market tilted heavily in favour of diesel vehicles because of subsidy-created price differentials between petrol and diesel, which went uncorrected for decades. Under the public distribution system, food grain is routinely diverted to the open market, and subsidized domestic LPG often reaches commercial users.

To avoid future controversies like the one surrounding REEVs, policymakers need to include a minimum set of non-negotiables when framing subsidy programmes. First, every programme must have a clear target announced upfront. These should be measurable goals, not vaguely framed objectives like “encourage faster adoption."

Second, every programme must have intermediate milestones and periodic reviews to assess progress, ideally conducted independently of the implementing ministry or agency. Finally, every programme should strive to achieve specified outcomes, preferably technology-neutral, so the market can choose the best path to the goal.

Greater policy cohesion is also necessary, not only within the central government but between the Centre and the States, to avoid conflicts or dilution of objectives. In short, we need to move away from ad hoc handouts, often driven by lobbies or short-term political goals, and towards an evidence-based, outcome-focused subsidy policy.