Scrap Trap

Auto industry expects incentive-based scrappage policy for revival of sales

Jun 09, 2020 SINDHU BHATTACHARYA No Comments Like

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Owing to the severe impact on the overall sales of automobiles in India, following the spread of Covid-19 pandemic, the Indian automotive sector is pinning its hopes on the long-awaited Vehicle Scrappage Policy to spur the growth of the sector. While the policy is expected to be before the Union Cabinet for approval, industry experts believe that the benefits of the policy can only be achieved by incentivizing purchase of new vehicles in exchange for scrapping older ones. However, despite repeated announcements and discussions with industry stakeholders, India’s Ministry of Road Transport and Highways is yet to receive a final clearance from the Union Cabinet, resulting in lack of clarity for the manufactures operating in this sector.

Recently, Nitin Gadkari, India’s Minister for Road Transport and Highways announced that the much-awaited policy is soon expected to be before the Union Cabinet for approval. According to Gadkari’s latest interaction with society of Indian automobile manufacturers (SIAM), he has been reportedly pursuing the scrappage policy since last two years, and expects co-operation from the other ministries and stakeholders for its smooth implementation. 

TURN OF SPEED spoke with multiple stakeholders to understand the exact benefits and impact of the scrappage policy. In the absence of specific contours of the policy (a draft proposal was earlier circulated for industry comments), industry experts and analysts have warned that merely disincentivizing ownership of vehicles older than, say, 15 years, will not help in boosting sale of new vehicles. According to the experts, the focus of any such policy should be on providing attractive incentivization for purchase of new vehicles or even used vehicles and scrapping older ones. 

Providing his views on the overall scrappage policy, Jinesh Rajpara, a senior analyst with India Ratings, said that the successful implementation of the policy is dependent on the incentive structure for the owner of the vehicle. With attractive incentives, an owner will voluntarily dispose the old vehicle. In addition to providing incentives, the policy should also focus on adequate scrapping infrastructure. A good incentive scheme coupled with an adequate scrapping infrastructure will not only help in improving demand for new vehicles but also increase the resale value of used vehicles. 

While there is an industry-wide expectation of certain favourable schemes, sources indicated of government’s lack of interest in introducing incentives. A senior automobile industry representative, who has been closely involved in discussions with the government over the contours of the policy, stated that though discussions have been going on for a long time, talks have stalled over financial implications of such a policy. “Each time the two sides discussed the policy, the government said that providing incentives entails a fiscal implication and that has not been approved by the Finance Ministry,” s/he said.

Providing further details pertaining to the government’s suggestions regarding various aspects of the policy, the above-mentioned automobile industry representative mentioned that the ministry had also proposed that the vehicle makers share the cost of incentivization. This suggestion was subsequently rejected by the industry. Further, the government recommended increasing the re-registration charge of an older vehicle, say, by 10 times. Currently, lifetime registration of vehicles is valid for 15 years and a mandatory re-registration is required thereafter at a nominal charge. According to the automobile industry representative, the suggested hike in the re-registration cost would potentially mean an increase of Rs 10,000-12,000 “and would not be disincentive enough”. 

Another suggestion provided by the automobile makers, in this regard, was to offer an incentive for scrapping older vehicles through a reduction in GST and road tax. With this, the state can generate additional income from new vehicle purchase, while also incentivizing scrapping of older vehicles. 

While various aspects of the policy are currently unclear, industry experts believe that the government, in the initial stage, should begin with substantial schemes for scrapping of older commercial vehicles (CVs). Abhishek Jain and Priyasha Mohanty of brokerage Dolat Capital, pointed out earlier that the auto industry has been in a grip of a cyclical slowdown and through the scrapping policy, the government could address two issues. “Firstly, scrapping old trucks seems to be a short-cut to expedite a recovery in the CV cycle by bumping up demand for new trucks and a higher production. Second, it will help address the vehicular pollution, in Tier II/III cities and rural, by giving a push to new fleet which is BS-VI complaint. In that direction, for a CV operator, the incentives and subsidies on new vehicles will help compensate for the higher price of BS-VI trucks.”

A spokesperson for Tata Motors, India’s largest CV manufacturer, pointed out that a Vehicle Scrapping Policy would drive demand for cleaner vehicles. “A well-defined and effective scrappage policy is one of the key imperatives for driving demand of cleaner BS-VI vehicles and more appropriately so, in the current scenario of shrinking demand across end-use sectors. Replacement demand will remain the key driver for the sale of new vehicles, especially during the current year. Therefore, a policy with clear definition of ELVs (End of Life Vehicles) and financial incentives would achieve two possible objectives – create demand for cleaner BS-VI vehicles, while also curbing pollution levels. The Government’s proposed renewal of fitness certificates for vehicles older than 15 years every six months, instead of the current time frame of one year, is a welcome one.”

Rajpara of India Ratings said that the focus of scrapping policy could be on CVs since passenger vehicles owners typically buy new vehicles after five years or more. Also, the transport fleets of some states have older vehicles. He referred to states such as Bihar where the age of the bus fleet is likely over 15 years, while Maharashtra, Gujarat and Andhra Pradesh have a much younger fleets because of recent renewals. India Ratings has estimated that there were about 1.2 million registered CVs, which are 15 years or older, constituting about 16% of the total on-road CVs. The rating agency also said that, a favourable policy will not only boost new vehicle sales, but also help in increasing sales of used commercial vehicles.

In any case, the policy should provide tangible incentives for scrapping older vehicles, echoed the industry players. Tata Motors envisages that the new draft policy will drive fleet modernisation but it needs to define tangible incentives for customers, as well as regulatory norms for enforcing the disposal of older vehicles. “In India, scrappage value chain is in early stages, and is only able to process lower double-digit percentage of the total ELVs available on road. India will need multiple environmental-friendly scrappage centres across the country to cater to the local needs of each region. Current setups, which are limited to a few clusters, cater to the local needs and are devoid of capacity to scrap total ELVs on the road. The draft policy also needs to address the criteria to define dismantlers and a mechanism to ensure adherence.”

Evidently, while the industry is eager for a Vehicle Scrapping Policy now more than ever before, there are several issues around quantum and mode of incentivization of new vehicle purchase and modalities of scrapping older vehicles, which will first need to be worked out. 

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