Is It a Win-Win Formula For Auto Industry?

After a long wait, the Union Minister for Road Transport and Highways (MoRTH), Nitin Gadkari, finally announced the vehicle scrapping policy in the Lok Sabha on March 18, 2021.
Speaking in Parliament, he said the policy aims to keep old polluting vehicles from plying on roads. He highlighted that there are 51 lakh vehicles in India which are older than 20 years, 34 lakh vehicles that are more than 15 years old and around 17 lakh vehicles aged more than 15 years, but do not have vehicle fitness certificates.

He also said, old vehicles pollute air 10-12 times more compared to those that are fit, and also pose a risk to road safety. Now, after the implementation of this policy, commercial and private vehicles will be de-registered after 15 and 20 years respectively and their re-registration will be discouraged. Owners of old vehicles will get strong incentives to scrap old and unfit vehicles.
Further, the new vehicle scrappage policy will be a win-win proposal for the auto industry. According to Nitin Gadkari, scrapping old vehicles will lead to increased demand for newer ones, which will boost the auto sector. The move will also help both the Centre and states to garner more GST. The policy is likely to come into effect later this year. Gadkari added that the criterion has been adapted as per the international best practices and standards followed in countries such as Germany, the UK, US and Japan.
Steel360 tries to analyse the different provisions of the new Vehicle Scrappage Policy… what it means for old vehicles, in what ways is it going to boost the auto sector and, how significant a step it will be towards reducing pollution.

Vehicle Scrappage Policy -What Does it Mean?

Under the new policy, all commercial vehicles will get de-registered after 15 years of use and private vehicles after 20 years of use, if they fail to submit their fitness certificate. Besides, all government and PSU vehicles above 15 years of age may also get scrapped and the tentative date for this is April 1, 2022. However, vintage cars are exempt from the rule.
Prashant K. Banerjee, Executive Director, Society of Indian Automobile Manufacturers (SIAM), said, “There is a dire need to institutionalise automobile recycling in India and figure out methods to dispose ELVs in an environment-friendly manner. We firmly believe that the vehicle scrappage policy of the government will not only help in removing old and polluting vehicles from roads, but will also augment the demand for new vehicles with better emission technology, resulting in optimum utilisation of the nation’s resources like fuel, metals, raw material and so on.”

How to Get a Fitness Certificate?

Fitness tests can be done at any government-certified fitness centre and it is said that appointments can be booked online. Also, the test reports will be generated electronically. In case of a failure to obtain the fitness certification or if the vehicle is found unfit, it will be deregistered.
But that’s not the only attempt to discourage use of older vehicles. The scheme also proposes to increase the re-registration fees for heavy commercial vehicles to INR 12,500. For personal vehicles like cars, it is INR 5,000 which is more than eight times the current amount of INR 600. In addition to a hefty fee, for any delay private vehicles could be charged INR 300 to INR 500 as penalty per month and for commercial vehicles, there is a daily penalty of INR 50.
Incentivising the customer is also a crucial part of the policy, which says that people are likely to get 4-6% of the value of their vehicle when they take it for scrapping. People may also get a potential road tax rebate of up to 25% of new personal vehicles and up to 15% for new commercial vehicles from the state government.
Under a potential discount of 5% which will be offered by automobile companies against scrapping certificates, Gadkari, in his speech during a Parliament session, highlighted the current status of old vehicles in India. He said, “We have 5.1 million light vehicles which are more than 20 years old, 3.4 million light motor vehicles which are more than 15 years old, and around 1.7 million mid- and heavy vehicles which are more than 15 years old, and do not have vehicle fitness certificates.”

Beneficial for Auto Industry?

According to MoRTH, phasing out of the old vehicles is expected to increase demand for cars and the overall turnover of the auto industry would increase by around INR 5.5 lakh crore from the current INR 4.5 lakh crore. Recycled materials from old vehicles will also help in reducing prices of vehicles and the industry will get a minor boost from this factor too. The industry currently gets revenues worth INR 1.45 lakh crore from exports which could increase to INR 3 lakh crore. Materials like steel, plastic, rubber, aluminium etc that are used in manufacturing automobiles would see a significant decrease in prices too.

Investments & Job Opportunities

A recent estimate by MoRTH states that the policy would attract investments close to INR 10,000 crore. Apart from this, the ministry also expects to create around 3.7 crore jobs in the organised sector after the policy is rolled out.

Dual System of Incentives & Disincentives

Amit Varadan, Joint Secretary, Ministry of Road Transport and Highways, said: “When we shift to newer vehicles, fuel consumption and maintenance costs get lowered, there is increased safety for passengers, newer vehicles are more environment friendly. So, there will be reduction in vehicular pollution. Low-cost raw materials can be obtained from scrap which can be used in other industries like steel and there are other rare earth metals too. We also intend to bring the informal vehicle scrapping industry into the formal sector. These are the main objectives. It is also estimated that this step will boost investments by about INR 10,000 crore and lead to 35,000 more jobs.”

He explained that, this policy has a dual system of incentives and disincentives. Let’s start with the incentives. First, when the older vehicles are scrapped, the scrapping centre will offer some value for it. Typically, it would be 4-6% of the ex-showroom price of the new vehicle. Secondly, state governments can offer a rebate of up to 25% on road tax for personal vehicles and up to 15% for commercial vehicles. Thirdly, the government will urge the auto original equipment manufacturers to provide a discount on purchase of new vehicles against the scrapping certificate provided. Fourth, when a vehicle is scrapped, there will be an incentive of a waiver of the registration fee for new vehicles against the scrapping certificate.
Where disincentives are concerned, Varadan added there are three kinds. One is that after 15 years, when a personal vehicle goes for re-registration, a registration renewal fee will have to be paid, and for which a hike proposal has been made. Secondly, a fitness testing fee will be imposed, which will also increase. Thirdly, a fitness certification fee will be required and which the government also plans to increase.
“Already, about seven fitness centres are operational, but we want to tweak the rules a bit. These will come soon. Automated tests will be conducted on various aspects of vehicles, which are laid down in central motor vehicle rules, like meeting emission and road safety norms etc. There will be detailed automated tests conducted in these scrapping centres and if a vehicle fails the fitness test, then it will be recommended for scrapping.
However, there is a provision for an appeal for a retest. If the owner makes some changes in the vehicle after failing the first test, there will be a retest, but if the vehicle still fails the second fitness test, then it will be deregistered and sent for scrapping.

Key Challenges

Talking about potential implementation challenges, Arun Malhotra, former Managing Director, Nissan India, said effectively the number of stakeholders in this entire exercise of scrappage of vehicles are the original equipment manufacturers (OEMs) and their dealers, government authorities like the states, scrappage centres, regional transport authorities (RTOs) and fitness centres.
He added: “Now, the entire value chain has to be synchronised. Investment in scrappage centres is very high and, today, we only have one of them in the country. In a large country like India, we need at least 10 to 12 scrapping centres, which require high investment, and these will probably also take some time to come up.”
The second challenge, Malhotra said, are the fitness centres, which are technology-driven with lesser human intervention and, therefore, will require a certain level of investments.
The third challenge is the 5% discount on the ex-showroom price which the government expects OEMs to offer on showing of the scrappage certificate. This 5% discount, OEMs say, is on the higher side.
“So, how these benefits actually come to the table and then get synchronised, is a challenge. There should be a coordinating body that should look at the synchronisation steps and if there are any bottlenecks that need to be removed,” he added.
The government’s ambitious aim to set up about 50 scrapping centres by December 2023 and 75 fitness centres by March 2023 is itself a big challenge.

FADA Upbeat

The new policy is aimed at boosting the auto industry, which has been facing a slump since even before the pandemic. As per data from the Federation of Automobile Dealers Associations (FADA) which is the apex national body of automobile retailers in India, retail sales of vehicles in India declined 13.43% y-o-y in February, 2021 and 9.66% y-o-y in January, 2021. With the long-awaited vehicle scrappage policy just rolled out, the automobile industry is eagerly waiting for details and the timeline for its implementation.
Vinkesh Gulati, President, FADA, said: “While FADA is thankful to the finance minister for announcing the voluntary scrappage policy, it continues to await the fineprints of the same. Auto registrations continued to fall in double digits by -13.43% y-o-y in February. While tractors maintained their outperformance compared to the broader market, passenger vehicles witnessed double-digit growth on a low base of last year as India started transitioning from BS-4 to BS-6 emission norms. This, coupled with the global semiconductor shortage, kept the waiting period of passenger vehicles as high as eight months. A FADA survey showed that 50% passenger vehicle dealers lost 20%+ of sales due to non-availability of vehicles.”
The two-wheeler category continued to see sluggish demand as the new wave of Covid in certain states kept customers away. Enquiry levels also narrowed as many educational institutions were still reluctant to resume classes. Fuel prices are at a historic high and have put a dampener on sentiments. This, in turn, has pulled the brakes on sales of the entry-level, price-sensitive category.
“Overall, the commercial vehicles segment continues to falter as availability of finance, negligible sales of passenger buses due to closure of educational institutes and supply-side constraints kept registrations in the deep red. Light commercial vehicles, which saw good pent-up demand during the last few months post-unlocking, have now started to fall flat. Tippers and heavy commercial vehicles are, in turn, showing initial signs of revival as government’s infrastructure push has started creating its demand,” FADA’s Gulati said.

Improved Domestic Ferrous Scrap Availability

Steel industry analysts believe that the policy is expected to give a big boost to India’s domestic ferrous scrap availability and, in turn, help in achieving India’s steel capacity target of 300 MnT. India’s ferrous scrap demand is expected to increase significantly in the coming years from the present levels of around 30-32 MnT per year.
Mitul Shah, Vice-President, Research, Reliance Securities, said the vehicle scrapping policy is an initiative that was long-awaited. “It is a step in the right direction and a positive development for the automobile industry. The move would benefit all automobile segments, while the M&HCV bus segment would be the key beneficiary as the major chunk of bus sales comes from state transport corporations, which are under the control of respective state governments.”
In May 2016, the government had floated a concept note on Voluntary Vehicle Fleet Modernisation Programme (V-VMP), proposing to replace 28 million vehicles bought on or before March, 31, 2005 with the resultant impact of benefiting the environment and ensuring that the replacement vehicles were BS-IV compliant. Monetary incentives were proposed to vehicle owners shredding their old vehicles in the form of scrap value of the old vehicles, automobile manufacturers’ special discount and partial excise duty exemption.
The new vehicle scrapping policy is a progression from the draft V-VMP and aims at encouraging fuel-efficient and environment-friendly vehicles replacing older ones. It is estimated that the policy would cover over 10 million light, medium and heavy motor vehicles, which cause high pollution compared to the latest versions. While the move will lead to fresh investments of around INR 100 billion, it is expected to create as many as 50,000 jobs. Apart from stimulating investment, the scrapping policy would also lead to recycling of waste metal, improved safety, lower air pollution and reduced oil bills (due to greater fuel efficiency).

Boost to Eco-friendly Vehicles

According to various reports, there are at least over five million vehicles in India that are over 20 years old. Removal of such polluting vehicles is expected to give space to more fuel-efficient and non-polluting counterparts like electric vehicles. It is said that the removal of old vehicles from the road is expected to reduce air pollution by at least 25%. During the Budget Speech, Finance Minister Nirmala Sitharaman also said the policy will promote fuel-efficient and environment-friendly vehicles that will help reduce huge oil import bills. Rising oil import bills and fuel prices are expected to boost electric car sales that produce zero direct emissions and are slightly cheaper thanks to government subsidies.