How The Vehicle Scrappage Policy Would Shape The Indian Auto Sector?

In the budget this year, Finance Minister Nirmala Sitharaman announced the Vehicle Scrappage Policy to banish the usage of older vehicles. As per the policy, “private cars older than 20 years and declared unfit will be scrapped and for commercial vehicles, the age is up to 15 years.” As per the Road Transport and Highways Minister Nitin Gadkari, the policy would give a 30 percent boost to the Indian automobile sector and will reach a turnover of Rs 10 lakh crore in the coming years. 

The Fine Print of the Policy

1. The policy would encourage people to scrap their cars older than 20 years, while for commercial and heavy vehicles like trucks, buses, etc. the limit is set to be at 15 years. 

2. A green tax may be applied to the usage of old vehicles.

3. A road tax of 10 to 25 percent could be imposed on the personal vehicle older than 15 years at the time of getting a renewal registration certificate. 

4. The Central Government has advised states to provide a rebate of up to 25 percent on-road taxes for newly purchased vehicles and a waiver on new registrations if the buyer provides the scrappage certificate. 

5. At the time of renewing registration, vehicles will have to pass through an automated fitness test. Only on clearance, the registration certificate would be awarded. Indirectly, it would make the volunteer policy mandatory as it would be costlier to get it renewed.

6. The government has permitted 26 centers for giving fitness certificates to be operated by state governments or under PPP. 

7. From April 2023, the government will begin the mandatory fitness testing of heavy commercial vehicles, and for other categories, it will start from June 2024 in a systematic phased manner.

The Impact on Auto Sector

As per estimates, taking 1990 as the base year, at present around 37L CVs and 52L PVs are eligible for voluntary scrapping. As people would opt to scrap their old vehicles, it would automatically raise the demand for new ones. 

Many countries have also implemented such policies to boost their economy or to reduce the toxic impact on the environment. For example, after the Financial Crisis of 2008 to boost the economy, the United States introduced the ‘Car Allowance Rebate System’ or ‘Cash for Clunkers’ program in which people were provided with approx $4500 for scrapping old vehicles. That led to more than 7,00,000 vehicles being sent to the scrapyard. 

Though it also led to one more change in the mindset of people - they opted for cars which were cheaper by around $4,600 compared to the car they owned previously. Also, the newly purchased cars had 58 percent superior fuel efficiency than their old cars. A similar impact at a lesser scale can be expected in the Indian ecosystem with slightly higher costs on retaining older vehicles. 

At present, Indian EVs are costlier compared to petrol or diesel counterparts. The cheapest EV car in India is Tata Teego which costs around Rs. 9.58 - 9.90 Lakh*, while the rest of the medium-range cars averagely cost around Rs. 22 lakhs. If enough encouragement and lower prices are given, the usage of electric vehicles can also be hiked. 

Overall, for the new and used car industry, this is an encouraging step as this will ensure that cars move faster in the journey from new to used and then to scrap while polluting less. This ensures that the used and new car industry keeps pace with the growth of the economy and upgrades the upwardly mobile middle class of the country in particular. 

Challenges Ahead

The main factor for implementing this policy would be to get the infrastructure ready to scrap vehicles in large numbers. Not all auto parts are recyclable like batteries, video display screens, headlamps, sensors, switches, etc. can’t be reused, thus plucking them out and disposing of them so that it doesn't harm the environment would be a humongous task. 

The government is also yet to decide the car scrapping incentives to be provided to volunteers to scrap their old cars. Also, would it be paid by the central or the state government, and what would be the criteria are the details to be looked forward to. 

The Environmental Perspective

As per a reference note presented in the Lok Sabha, there were just 0.3 million motor vehicles in March 1951, which has increased to 230.03 million in March 2016. That is indeed a great developmental milestone. But the impact of very old vehicles on our environment is severe.

Old commercial vehicles account for only 5 percent of the total vehicle, but when it comes to pollution, they contribute 65 to 70 percent. The same goes for vehicles older than 20 years, they account for only 1 percent but contribute 15 percent to the total vehicle pollution. 

With the increased number of vehicles, and people using old vehicles, the concentration of pollutants such as carbon monoxide (CO), photochemical oxidants, nitrogen oxides (NOx), air toxins, namely benzene (C6H6), aldehydes, 1,3 butadiene (C4H6), lead (Pb), in the air we breathe is going up.

The implementation of this vehicle scrappage policy would start from 1st April 2022 and hopefully, it would bring a positive change on the environment with people realizing the impact of efficient vehicles, along with it giving a much-needed boost to the Indian automobile sector in the coming years. 

References 

http://164.100.47.193/Refinput/New_Reference_Notes/English/Vehicular%20pollution%20in%20India.pdf

https://www.businesstoday.in/sectors/auto/green-tax-for-older-vehicles-soon-to-cost-up-to-50-of-road-tax/story/429070.html

https://www.cardekho.com/electric-cars

https://auto.hindustantimes.com/auto/news/india-will-soon-bring-in-vehicle-scrappage-policy-what-does-it-mean-41588916564210.html

https://qz.com/india/1968834/will-indias-car-scrapping-policy-help-auto-firms-environment/

https://swarajyamag.com/ideas/vehicle-scrappage-policy-how-modi-govt-has-a-great-opportunity-to-help-economy-and-environment-and-create-jobs

Amit Kumar.

Guest Author The Author is the CEO of OLX autos in India. He was earlier Managing Director of Kaymu (Merged with Jumia, Listed on NYSE). He likes to write about Leadership, Startups, and Economics.