Scrappage Policy to turn mandatory

Steel Insights Bureau

The government has released the much awaited voluntary scrappage policy under which commercial vehicles beyond 15 years old and which fail to obtain a fitness certificate from automated fitness centres, will be de-registered and declared as end-of-life vehicles.

For private vehicles, the same rule will be applicable to vehicles over 20 years old.

Direct incentives under the policy include a scrap value for old vehicle (ranging between 4-6 percent ex-showroom price of a new vehicle), 5 percent discount on the purchase of a new vehicle against the scrapping certificate and registration fee waiver.

Additionally, there could be road tax rebates of up to 25 percent for passenger vehicles and up to 15 percent for commercial vehicles (as advised to state governments).

Voluntary scrappage policy is aimed at curbing pollution, replacing the existing fleet of less fuel efficient vehicles and increasing road safety.

"The government's intent to support old vehicle owners though lower taxes and a probable GST rate cut. Moreover, with mandatory fitness testing for heavy commercial vehicles starting April 2023, adhering to global standards, we feel that voluntary nature of policy will convert into a mandatory nature, providing the long term solution for the industry, environment and road safety," ICICI Securities said in a report.

The government's initiative of mandatory scrapping its owned vehicles (at state, Centre as well as PSU level) over 15 years old starting April 2022 also depicts its positive intent and will support industry growth in the interim period, the report said.

Impact on demand

"The policy is expected to catalyse demand for new vehicles and indirectly pave the way for promoting electric vehicles, the adoption of which is so far at the nascent stage," Brickwork Ratings said adding that moderate incentive structure for vehicle owners, as outlined in the policy, in itself, may not be effective in creating meaningful new demand.

"However, scrappage policy will provide stimulus to private vehicle owners to advance purchases due to the high cost of fitness testing, among others," Tanu Sharma, Director-Ratings at Brickwork Ratings, said.

“Additionally, in the long-run, the policy may also bring down the cost of automobile production by recycling scrap, and thereby aid job creation,” Sharma said.

On the other hand, the policy is expected to improve demand for medium and heavy commercial vehicles, which have seen considerable contraction over the last 2 years. Hence, recovery over the low base is expected, which will see acceleration post mandatory testing (commencing 2023).

The earliest benefits will be in the form of replacement of 15 years and above government vehicles from April 2022 onwards. The population of these is about 250,000, largely consisting of Passenger Vehicles.

"Assuming this demand comes in FY23, the incremental sales could be about 6-7 percent of the total industry sales in our view. Major beneficiaries would be Maruti Suzuki, M&M, Tata Motors and more likely for the alternate fuel vehicles," a report by Centrum said.

Old vehicle scenario

India has 51 lakh light motor vehicles above 20 years old. Volume of medium & heavy commercial vehicles above 15 years old and without a valid fitness certificate is about 17 lakh units.

These old vehicles emit 10-12 times more carbon emissions, are highly fuel inefficient and unsafe to ply on Indian roads with outdated braking systems.