Loose Wires: Understanding the Subsidy Mismatch in EV Policy

Transportation is the second most GHG emitting sector in Asia, and electric vehicles (EVs) are critical to decarbonizing the sector. India and Thailand are the biggest markets for EVs in South and Southeast Asia and have launched progressive EV subsidy schemes—despite these schemes, EV adoption has struggled, facing lower-than-expected sales volumes, complaints from Original Equipment Manufacturers (OEMs) due to inability to keep up with local manufacturing requirements. However, by decoupling manufacturing and consumer subsidies, with stronger manufacturing incentives, emerging Asian markets can design subsidies to more effectively build a self-reliant EV manufacturing base without hindering demand growth.

Understanding India’s FAME I/II and Thailand’s EV 3.0/3.5 schemes

While India’s Faster Adoption and Manufacturing of EVs (FAME) I/II  was lauded as the catalyst for India's EV growth, it suffered numerous challenges. Concerns of compliance with the scheme's localization norms resulted in government-led investigations into fraud and subsidy misuse. There are also worries that adoption-focused subsidies move focus away from India’s EV manufacturing goals.  
EV 3.0 (2022 – 2024) and EV 3.5 (2024 – 2027) facilitate subsidies for domestic and imported EVs and components, but with stringent requirements for local assembly. Manufacturers and OEMs are struggling under EV3.0 and EV3.5’s local manufacturing requirements, citing shrinking demand, rising consumer debt, and stricter loan requirements strangling consumers and manufacturers.

Decoupling Adoption and Manufacturing

A common thread between India’s FAME and Thailand’s EV 3.0 and 3.5 schemes is the direct link between manufacturing and consumer incentives, which has either strained manufacturers or stunted demand growth.

Tying consumer subsidies to manufacturing obligations creates friction: while scaling new manufacturing is slow, consumer demand can rise quickly. This mismatch can result in subsidy underutilization, investments below expectations, or stunted demand growth. In Thailand, manufacturers have struggled to keep up with local manufacturing requirements. Under EV3.5, operators must assemble 2 EVs locally for every vehicle imported in 2026, increasing to 3:1 for 2027. The pressure was such that the Board of Investment temporarily extended compliance deadlines – an example of how stringent manufacturing requirements can result in policy uncertainty and motivate hesitancy among investors and the market. Conversely, in India, adoption was relatively high, but the misuse of $30 million in subsidy funds led to less value add to local supply chains. The resulting suspension in subsidies meant sales fell drastically, a consequence of tying manufacturing requirements to consumer-facing subsidies.

Through decoupling, the growth of one lever is not limited by the other. Scaling manufacturing is lengthy and coupled incentives can hamper consumer growth and hurt the profit margin targets of domestic OEMs. 

A phased model for a decoupled incentive structure can be introduced that slowly introduces local content requirements that balance early affordability for consumers with the maturing of domestic manufacturing and supplier networks. 

•    Years 1 – 2: Independent Adoption Incentives
o    All vehicles (foreign/imported or domestic) are eligible for consumer subsidies, including upfront pricing support, Goods and Services Tax (GST) reduction, and registration waivers.
•    Years 3 – 5: Baseline local manufacturing requirements
o    OEMs must meet criteria for local content or commit to Capex investments in local manufacturing to avail subsidies. 
o    Subsidy design and management should be conducted by a third-party body with industry and consumer representation.
o    Consumers can utilize subsidies regardless of localized content
•    Year 6 onwards: Stricter local manufacturing requirements
o    Consumer subsidies can only be availed if the vehicle meets minimum local content requirements.
o    Industrial requirements can be tightened, in consultation with the third-party body.

 
Designing Effective Incentives for Local Manufacturing
While local manufacturing requirements are a powerful tool, they must be preceded by strong manufacturing reforms that enable foreign investment, increase research and innovation, and support workforce skilling. Forced localization is not guaranteed to increase competitiveness, as happened with solar and wind technologies.

Since 2017, Thailand’s Board of Investment have passed reforms to increase investments in the sector, including excise tax reductions and designating duty-free zones for industries supporting the use of EVs. Similarly, countries can designate industrial clusters focused on EV components. These zones can offer tax breaks, land parcels for manufacturing, and streamline permitting processes for domestic and foreign OEMs and investors. 
Production Linked Incentives (PLI) are also effective, as India has shown. India's PLI schemes, for auto-manufacturing and components, and advanced cell chemistries, have boosted domestic manufacturing through subsidies tied to incremental sales target products. As of 2025, the auto scheme mobilized USD  4 billion (INR 360 billion) in incentives, generated USD 3.6 billion (INR 330 billion) in sales, and created approximately 49,000 additional jobs.

The decoupling of manufacturing from consumer subsidies paired with stronger manufacturing incentives will allow domestic EV manufacturing to grow without hampering domestic adoption growth. Intentional subsidy design will increase utilization, foreign and domestic investments, and provide a stable platform to grow a robust EV ecosystem.

Abhinav Subramaniam is a program coordinator and research assistant for the Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies (CSIS).