Rationale of the new Vehicle Scrappage Policy?
The Vehicle Scrappage Policy has been designed with four broad goals in mind.
- Most old vehicles tend to be petrol and diesel guzzlers. In comparison, newer cars adhering to the latest Euro norms, are sharply more efficient in terms of fuel usage. With the rising oil import bill posing the biggest threat to Indian macro stability, this scrappage policy can make a macro difference.
- Apart from fuel efficiency, environment concerns also take precedence as vehicles have been the biggest contributor to environmental pollution in the last 20 years. The new car models are 8-10 times less damaging to the environment and it will be a green edge.
- The third important rationale is to give a boost to auto demand. Automobiles are the largest manufacturing industry in India and has been in the doldrums for last 2 years. It is estimated that Vehicle Scrappage Policy will catalyse the demand for cars in India.
- Finally, this move is expected to create a virtuous cycle of spending, funding and consumption. As India struggles to push its GDP back to double digit growth, vehicle scrappage could be a big contributing factor in the coming years.
The proof of the pudding lies in the implementation and so Nitin Gadkari has gone ahead and even announced dates for various milestones. Here is the process at work.
- Vehicles will be judged as fit / unfit based on parameters like emission tests, braking quality, available of safety equipment and other relevant tests under CMV Rules 1989.
- Government and PSU vehicles older than 15 years and private vehicles older than 20 years will have to be scrapped. These rules for fitness tests and scrapping centres will be applicable from October 2021 and for PSU vehicles from April 2022.
- HCV mandatory fitness test will be effective from April 2023 while it will be effective for other categories from June 2024.
- Even if vehicles are found fit after 15 years, higher re-registration fees will be applicable. However, latest by the end of 20 years, all vehicles will be mandatorily scrapped.
While penal provisions do work, it is incentives that work best when we are looking at large scale policy changes. There are substantial incentives for scrapping.
- Specially created scrapping centres will offer up to 6% of the ex-showroom price as value for the scrapped old vehicle. That is a reasonable valuation.
- Auto companies are advised by the government to provide 5% discount on the purchase of new vehicles against scrapping certificate. It is not a mandatory benefit.
- State governments have been asked to offer road tax rebate up to 25% for personal vehicles and 15% for commercial vehicles against scrapping certificate.
- Government has also promised that registration fees on the new vehicles would be waived off for purchase of new vehicles against scrapping certificate.
Will auto companies benefit from this policy?
It is estimated that the vehicle scrappage policy would push auto industry sales from the current level of Rs450,000cr to Rs10,00,000cr. This would benefit most of the listed auto companies like Maruti Suzuki, Mahindra & Mahindra and Tata Motors. Auto companies can also set up auto fitness centres which will be a forward integration for comprehensive ownership of the customer experience.
In addition, vehicle scrappage facilities will be open to private parties and surplus land can be leveraged. Of course, scrapping of vehicles will also boost availability of low-cost raw materials like plastic, steel, aluminium and rubber which can reduce the cost of raw materials for auto OEMs.
There will be some key challenges too
Smart implementation of this policy and getting the buy-in of stakeholders will hold the key. Here are some of the challenges that one can foresee to vehicle scrappage policy.
- Vehicle scrappage facilities are extremely space intensive. The new scrappage policy will require vast tracts of land to handle scrapping on such a large scale. Hence, easy availability of low-cost real estate will be a key challenge.
- Scrapping of road taxes and registration fees on vehicles will entail loss of revenues for the states and local governments. The government must have a plan to compensate local bodies for these losses and that will entail a cost.
- The biggest challenge to auto demand has been the inordinately high GST rate of 28% putting cars at par with cigarettes. That needs to change, if the vehicle scrappage policy has to really deliver the goods. After that, it is over to implementation.