THE OLD VEHICLE SCRAPPING POLICY 2021

Union Finance Minister Nirmala Sitharaman presented the Annual Budget which holds great significance primarily because it is the first budget since the outbreak of the Covid-19 pandemic. While there are plenty of talking points of the latest budget, one highlight which certainly got noticed by folks in the automotive industry was the introduction of a Vehicle Scrappage policy.

The new policy will be applicable to cars and commercial vehicles which are older than 20 or 15 years, respectively. This scheme will require all private vehicles older than twenty years to undergo a fitness test. According to the Finance Minister, this fitness test will be conducted at automated fitness centres which will evaluate whether or not the vehicle in question is fit to run on roads. If not, the vehicle will then head to a scrap yard. While it is possible for a vehicle to pass the fitness test, each such test would set back an owner by Rs 40,000.

In addition to this, one has to pay an equivalent road tax and a possible “Green Tax” that one has to pay while mandatorily renewing his/her private vehicle’s registration after a 15-year period. Each fitness test has a validity period of five years after which the owner will require to undergo another fitness test costing the same amount of money. The government believes the cost of fitness tests and the cost of keeping a vehicle is up and running will dissuade owners from constantly renewing a fitness certificate.

The policy also adds that a particular vehicle would get three attempts to pass a fitness test. If the vehicle fails in all three attempts, the owner does not have many options left other than shipping it to a scrap yard. A vehicle that has failed the fitness test is deemed unregistered and hence is illegal to drive on roads. The new Vehicle Scrappage policy is also expected to offer monetary incentives to owners sending their vehicles to a scrap heap.

The policy will take effect from April 1, 2022, while more details such as setting-up of scrappage docks/yards, etc. will be furnished in time to come by the Ministry of Road Transport and Highways. As of now, over 51 lakh vehicles both private and commercial fall under the scrutiny of this policy. Their removal will not only help for a surge in demand for new vehicles but also adopt newer technologies like electric vehicles which are most likely to be exempted from this policy.

OPPORTUNITIES

Government's point of view

• A well-defined vehicle scrappage policy in India can help create an industry of its own with a business opportunity of $6 billion (Rs 43,000 crore) a year.
• It could generate fresh employment and trigger economic growth, and also act as a critical factor to revive the automobile market that has been hit by a prolonged slowdown.
• The government expects recycling of metals like steel, copper and aluminium from the scrapped vehicles to help reduce their imports.
• Getting the roads rid of old vehicles would also help lower pollution and the government’s oil bill, as the new vehicles replacing the old ones would be more fuel efficient.

Industry's point of view

• The automobile industry wants the policy to cover all segments, including cars and two-wheelers and not just commercial vehicles, to create a significant scale for new players to participate in this new market.

Researchers' point of view

• An HDFC Bank study has estimated the market for vehicle scrappage and recycling at $6 billion. According to it, if the policy is defined well, 9 million vehicles could go off roads by fiscal 2021 and 28 million by 2025, largely comprising two-wheelers. It would reduce carbon dioxide emission by 17% and cut particulate matter in air by 24%. Also, if half the Bharat Stage-II and III vehicles go off the roads, it would save 8 million tonnes of oil a year.
• “A comprehensive scrappage policy will result in reduction in costs, save foreign exchange and increase revenues in the long term,” said Ashok Khanna, the group head for auto finance at HDFC Bank.
• The policy can be a win-win for all, said Khanna, as the consumer would benefit from the scrap value, GST savings and discounts, while a dealer would gain from demand for new vehicles. For a vehicle maker, recycled metals would be available at a cheaper rate, and the government could save forex because of lower imports of these raw materials as well as get tax revenue from new vehicle sales.
• According to the HDFC Bank report, the steel industry imports about 6 million tonnes of steel scrap annually, which can be met locally if old vehicles are recycled.
• Apart from $6 billion steel scrappage potential, there is additional business that can be generated from recycling of plastic and rubber and other body parts.

CHALLENGES

• Three critical things the government needs to do to promote scrappage are: offer sizeable financial incentives, develop a resale market for the scrappage certificate for those who don’t want to replace their scrapped vehicles with new, and cut the life period for commercial vehicles to 10 years from the currently proposed 15, said Satyakam Arya, the managing director of Daimler India Commercial Vehicles.
• Already the likes of Maruti Suzuki and Mahindra & Mahindra have ventured into the recycling business and there are another half a dozen companies in line to enter the space, say people in the know. The challenge is that scrap yards will take time to build.
• Khanna believes that recycle plants have to be fully integrated complexes, run and operated by major OEMs like Tata, Mahindra, Suzuki, Hyundai and Toyota may deliver a better result over 100s of small enterprises.
• Industry experts say vehicles should be scrapped based on their usage and not just the life of the vehicles.
• It is unlikely to insist on adoption of the policy because of socioeconomic pressures.
• Ashish Kale, president of the Federation of Automobile Dealers Associations of India (FADA), said since it would be a voluntary policy, there should be financial incentives equal to at least 10% of the new vehicle to the owner to make the scheme successful.
• “The focus should be more on financial incentivises rather than disincentives. If a 10%kind of benefit is extended, we see a lot of consumers taking advantage of the scheme,” Kale said. But given its weak finances, the government in India may not be able to extend any large financial support. However, state governments can provide tax rebates against scrappage certificates and manufacturers can give discounts, said experts.

SOURCES

A. Economic Times

B. Rushlane.com

C. Firstpost.com