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Vehicle Scrappage Policy 2021: Expectations and Challenges

IBEF, Knowledge Centre

Apr 06, 2021 14:29

Overview
The vehicle scrappage policy is a government-funded programme to replace old vehicles from Indian roads. The policy is expected to reduce pollution, create job opportunities and boost demand for new vehicles. Several countries including the US, Germany, Canada and China have introduced vehicle scrappage policies to boost their respective automotive industries and check vehicular pollution. For instance, the US has implemented the Car Allowance Rebate System (CARS), also called Cash for Clunkers programme, which offers credit incentives on scrapping older vehicles and replacing them with new and more fuel-efficient vehicles.

On February 1, 2021, Finance Minister Nirmala Sitharaman stated in her annual budget speech, “the government will announce a voluntary vehicle scrapping policy to phase out old and unfit vehicles.” She added, the move will help in encouraging fuel-efficient, environment-friendly vehicles, thereby reducing vehicular pollution and oil import cost.

On March 18, 2021, Nitin Gadkari, Minister for Road Transport & Highways, introduced the much-awaited vehicle scrappage scheme in the Lok Sabha.  According to the new policy, commercial vehicles of >15 years and passenger vehicles of >20 years will have to be mandatorily scrapped if they do not pass the fitness and emission tests. The idea is to phase out cars and CVs older than 15-20 years to slash urban pollution levels and stimulate automotive sales, which continue to suffer during India’s post-COVID recovery phase. Additionally, the vehicle scrappage policy is also said to be a part of a stimulus package majorly requested by the original equipment manufacturers (OEMs) to infuse their demand.

Proposed Incentives, Disincentives and Exemptions

Incentives for scrapping old vehicles and buying new ones:

  • Vehicle manufacturers can give up to 5% discount for buying new vehicles
  • Zero new registration fee
  • Scrap value equivalent of 4-6% of ex-showroom price of new vehicles
  • States can give up to 25% and 15% rebate on road tax for personal and commercial vehicles, respectively
  • Reduced maintenance cost and increased savings from fuel

Disincentives for keeping old vehicles:

  • States can levy an additional ‘Green Tax’
  • Hike in renewal of registration fee for private vehicles
  • Increase in renewal of fitness certification for commercial vehicles
  • Automatic deregistration of unfit vehicles

Vehicles to be exempted:

  • Strong hybrids and electric vehicles
  • Vehicles using alternative fuels such as CNG, ethanol and LPG
  • Farm and agricultural equipment such as tractors, tillers and harvesters

Tentative Timeline and Expected Benefits
The appointments will be generated online for which the Ministry of Road Transport and Highways (MORTH) has not specified any time, but the following tentative timelines:

  • October 1, 2021: Rules for fitness scrapping centres will be released
  • April 1, 2022: Fitness testing for government and public-sector undertaking (PSU) vehicles
  • April 1, 2023: Fitness testing for heavy commercial vehicles
  • June 1, 2024: Fitness test rules to be rolled out for other categories

According to MORTH, the policy will likely result in the following projected gains:

  • 30% boost for the Indian automobile industry from the current Rs. 4.5 lakh crore turnover to Rs. 10 lakh crore over the coming years
  • The export component of Rs. 1.45 lakh crore of the present turnover is likely to go up to Rs. 3 lakh crore
  • Availability of scrapped materials such as steel, plastic, rubber and aluminium will increase. This will be used in manufacturing automobile parts, which will reduce cost by 30-40%
  • Promote new technologies with better mileage of vehicles besides promoting green fuel and electricity
  • Decrease India’s huge Rs. 10 lakh crore crude import bill
  • Attract new investments of ~Rs. 10,000 crore and create as many as 35,000 jobs

Opportunity for the Automotive Industry
According to MORTH, there are ~17 lakh medium and heavy commercial vehicles (M&HCVs) that are older than 15 years without any valid fitness certificate, 51 lakh light motor vehicles (LMVs) older than 20 years and 34 lakh light motor vehicles (LMVs) older than 15 years. Also, the average age of commercial vehicles is over 10 years and the private vehicles is 10-15 years. Therefore, the proposed policy is also likely to boost sales of heavy and medium commercial vehicles that had been in the contraction zone since 2018.

Auto manufacturers have been struggling with the declining sales of commercial vehicles due to economic slowdown triggered by the bankruptcy of Infrastructure Leasing & Financial Services (IL&FS) and revised load carrying norms, which led to >20% increase in the freight carrying capacity of trucks. Besides, the Covid-19 pandemic has further impacted the sales of trucks and buses. As per the proposed rules under the vehicles scrappage policy, commercial vehicle fleet owners will have to abandon or scrap their vehicles after 15 years if they do not meet the fitness or emission criteria outlined by the government. As a result, this will generate new sales for original equipment manufacturers such as Tata Motors and Ashok Leyland.

Welcoming this move from the union government, a spokesperson of Tata Motors said, “Provisions in the policy such as compulsory fitness certificate, disincentivising re-registration of commercial vehicles after 15 years and private vehicles after 20 years, would encourage removal of old and polluting vehicles from the system. Largely, it addresses intents of all stakeholders from low import bill for scrap and crude oil, job opportunities for Micro, Small & Medium Enterprises (MSMEs), possibility of upside in new vehicle sales for OEMs, low operations cost for vehicle owners, safer & cleaner vehicles for consumers and a sustainable environment for all.”

Challenges
For the proposed policy to succeed, the most important step is to build an infrastructure of testing and scrapping centres quickly across the country. Due to the lack of a supporting infrastructure, implementation of the scrappage policy will be challenging. Currently, India has just seven automated fitness test centres and two authorised scrappage centres, which is inadequate to cater to the market. Further, the process to deregister vehicles also needs to be simplified. At present, deregistering vehicles is a dreadful experience for most owners who want to sell or scrap their old vehicles, thereby discouraging many interested in discarding old vehicles.

However, to overcome this challenge, the Society of Indian Automobile Manufacturers (SIAM), stated that it will work with the government to create an infrastructure for vehicle testing and scrappage centres across the country.

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