The Vehicle Scrapping Policy Set to Boost Automotive Sector in India

After a long waiting period, the Union Minister of Road and Transport introduced the vehicle scrapping policy. Unlike many other countries, India did not have in place a policy for either mandating or incentivising the voluntary scrapping of old vehicles. Many experts and journalists have covered this topic widely from various perspectives and have speculated the possible positive and negative implications of this policy. We have tried analysing these different voices and are presenting a balanced analysis in this article.

What is in the policy?

The vehicle scrapping policy makes a fitness test mandatory for all commercial vehicles (CVs) older than 20 years and all passenger vehicles (PVs) older than 15 years. The policy has made provisions for commanding heavy penalties from the vehicles that fail the fitness test and such vehicles could also be impounded by the government. Mandatory fitness testing for heavy commercial vehicles will begin from April 2023 and for other categories, it will start phase wise from June 2024.

What is the expected impact of this policy?

Presently, India has an estimated number of more than 10 million polluting vehicles running on its streets which include more than 5 million CVs that are more than 20 years old, around 3.4 million LMVs that are more than 15 years old, and around 1.7 million medium and heavy vehicles that are older than 15 years. They will need to be replaced. That number is more than double that of annual four wheeler production in the country !!

How will the vehicle scrapple policy boost Indian automotive market?

The possible stimuli to the automotive sector out of this policy are very significant. Since this policy provides for discounts on the price of new vehicles for the owners who scrap their old vehicles, it will encourage the owners of old and polluting vehicles to scrap their vehicles and buy new ones thereby increasing the demand for new vehicles. Incentives being given to the owners scrapping their old vehicles are considerable if not substantial:

• Scrappage value of the old vehicle will be roughly 4-5% of the ex-showroom price of a new vehicle.
• Up to 25% rebate for PVs and 15% rebate for CVs by the state governments in the road tax.
• 5% discount on new vehicles from OEMs.
• Waiver of the registration fees.

If one combines all the benefits, effective reduction in the cost price of the new vehicle will be in range of 9-10% which will form the carrot apart from the stick of the mandatory rule,  for the owners to scrap their old vehicles and buy new ones instead. There are anticipations that government will also increase the fees for the fitness tests of old vehicles which will further motivate the owners to scrap instead of applying for a fitness test.

Looking at the large number of vehicles due for scrapping, the amount of cheap raw material like steel, copper, aluminum, plastic which will be generated for the OEMs will be huge. This will further bring down the manufacturing cost and might lead to a decrease in the ex-showroom prices of the vehicles.

CARE Ratings called this policy a ‘win-win’ for all. As the number of polluting vehicles reduces, country’s oil imports are expected to come down on account of increased fuel efficiency. It will also curb the environmental pollution and enhance the road safety by cutting down the number of old and defective vehicles.  As per CARE Ratings, the policy has the potential to increase the automobile industry’s turnover to roughly USD 120 billion from the existing ~ USD 50 billion.

A recent statement by MoRTH states that this policy would attract investments to the tune of USD 1.2 billion and could create 37 million jobs in the organised sector.

Official representatives of key institutions have also welcomed this policy and expect a positive impact on the automotive sector. Rajan Wadhera, President, SIAM said that the guidelines will help in establishing organised vehicle scrapping facilities in the country. Vinkesh Gulati, President – FADA also welcomed the policy and highlighted the large number of vehicles due for scrapple considering 1990 as the base year. Deepak Jain, President, ACMA mentioned that combined with the other announcements such as increased spending on developing road infra, doubling of budget outlay for MSMEs, this policy will have lasting positive impacts on the automotive sector.

Along with institutions and associations, OEMS have also expressed their positive sentiments post the announcement of the vehicle scrapple policy. As per Satyakam Arya, MD & CEO of Daimler India Commercial Vehicles, the policy would create a chain that would spur demand for new and modern vehicles. Venkatram Mamillapalle, CEO and MD Renault India, Nagesh Basavanhalli, CEO and MD, Greaves Cotton, Saurav Kumar, Founder and CEO, Euler Motors and many other executives have expressed that this policy will turn out to be a boon in the long run.

Conclusion

When any change is introduced, it is favourable for some stakeholders and difficult for a few. In case of the vehicle scrapping policy, the number of stakeholders it benefits is far more than the number of stakeholders it affects. M.R. Kumaraswamy, President, State Lorry Owners Federation-Tamil Nadu stated to IANS how this policy would put additional strain on the trucking industry. Autocar India has also pointed out that the 5% discount expected form the OEMs would be an additional burden on them. Even if we look at these immediate challenges, they persist mostly from a short-term point of view. In the long run, this policy will prove to be beneficial to almost all the stake holders in the automotive supply chain.

For more information about the opportunities in the Indian automotive sector, write to me at sudhir.nerurkar@quanzen.com