Scrappage policy good for auto industry and buyers

The country has witnessed robust economic growth over the last two decades. This has led to rapid urbanisation across India, and urbanisation has stimulated travel demand further. This demand has been increasingly met by private vehicles. An increase in the vehicular population has also led to an increase in the number of obsolete vehicles (also called end-of-life vehicles, or ELVs) which are expected to increase by more than 1.5 times from 8.7 million in 2015 to 22 million by 2025, according to the Central Pollution Control Board.

ELVs which are not in working condition are dumped on roadsides or open plots, and the ones which are in working condition find buyers (as ‘pre-owned’ vehicles) despite being more polluting and less fuel-efficient than their newer counterparts. According to our research, the pre-owned car market in India is about 1.3 to 1.5 times the new car market and it is growing at about 17%-18% every year.

While some ELVs end up in scrapyards, most of them continue to remain on roads and create pollution and congestion. And the ones reaching the scrapyards undergo crude and unscientific methods of disposal resulting in contamination of air and groundwater.

Owing to lack of recycling/scrappage policy and enforcement regarding the same for old vehicles, the ELVs used to remain on the roads and create pollution and congestion. Hence, there was a dire need for a comprehensive and balanced policy in India to handle the ELVs. This policy would also help in reducing pollution, reduce consumption of oil with more fuel-efficient vehicles, generate demand for new vehicles, and help reduce the cost of raw material through better recycling.

A balanced policy announcement but ‘voluntary’

The Government of India has been cognisant of this fact and the recent policy announcement of the voluntary vehicle fleet modernisation programme by the government is a right step in this direction.

The policy proposes the following incentives and disincentives.

Proposed disincentives for old vehicle user:

1) Deregistration of vehicles—commercial vehicles which are older than 15 years (unfit or failure to get fitness certificate); private vehicles which are older than 20 years (unfit or failure to get re-registration).

2) Increased fees—for commercial vehicles with fitness certificate fees at 15 years; for private vehicles re-registration fees at 15 years.

3) De-registration and scrapping of all vehicles of national, and sub-national government entities after 15 years from registration.

Proposed incentives for new vehicle buyer:

1) Scrappage value (to be decided by the scrappage centre)—4%-6% of ex-showroom price of new vehicle as scrappage value for old vehicle.

2) Road tax rebate (policy advice to state governments)—up to 15% for commercial vehicles; up to 25% for private vehicles.

3) Discount against scrapping certificate (advice to vehicle manufacturers—5% discount on purchase of new vehicle.

4) Registration fee waiver against the scrapping certificate (advice to state governments)—waiver on registration fee for purchase of new vehicle.

The policy is a good mix of both—incentives for those who want to opt for scrapping their old vehicles and disincentives for those who would like to continue with their old vehicles. This fine balance should help in driving out ELVs from the roads, leading to reduction in pollution levels and driving demand for new vehicles. However, the policy being voluntary in nature, it will require strong enforcement measures from state governments to ensure that the policy is properly implemented, and its objectives are met.

Real benefits to the buyers

While the policy is balanced, and it covers various incentives for the new vehicle buyers, these incentives are left to the discretion of state governments, and vehicle manufacturers, except for the scrappage value of the vehicle. Hence, buyers across the country may or may not get the envisaged benefits from the incentives, and so it is important for the buyer to understand the range of benefits they may get from this policy.

Impact on auto industry

The policy will not only benefit the buyers, but global experience suggests that policy can act as a tool to stimulate auto demand. Moreover, it will open up a new business area of ‘scrappage yards’ which were unorganised so far. The vehicle manufacturers will get an opportunity to venture into this newly evolving area which will help them to reduce their input costs and owing to their better understanding of the chemical composition of different parts, they can offer better value to the new vehicle buyers.

Views are personal. Singh is Partner, Automotive Leader, Deloitte India; Mehta is Associate Director, Deloitte India.