Scrapping policy gives hope to auto sector

The policy for $6-billion-per-annum domestic vehicle scrapping and recycling market has raised hopes of sustainable recovery for the down-and-out automobile industry

It has been discussed for over a decade now, but at long last, the government announced a scrappage policy for passenger vehicles older than 15 years and commercial vehicles older than 20 years in Budget 2021. Though voluntary in nature to begin with, it is expected to open up avenues for the domestic automobile sector by creating a steady stream of recycled demand.

“Vehicles would undergo fitness tests in automated fitness centres after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles. Details of the scheme will be separately shared by the ministry,” Finance Minister Nirmala Sitharaman said in her Budget speech.

While the contours of the policy were not announced in the Budget, Minister for Road Transport And Highways Nitin Gadkari, who has been spearheading this, said the policy will be notified within a fortnight and lead to new investments of ` 10,000 crore per annum and create 50,000 jobs.

An HDFC Bank study had estimated the Indian market for vehicle scrappage and recycling at $6 billion per annum. If the policy is defined well, 9 million vehicles could go off roads by 2020/21 and 28 million by 2024/25, mainly twowheelers. It would also reduce carbon dioxide emission by 17 per cent and cut particulate matter in the air by 24 per cent. Also, if half of Bharat Stage-II and III vehicles go off the roads, it would save 8 million tonnes of oil a year.

Such schemes have been in place in developed economies, but their success depends on the incentives. The sweeteners could be in the form of a direct cash subsidy, interest subvention, tax cut or a mix of all these. After the global financial crisis, the US government’s scrappage initiative — the $3-billion ‘cash for clunkers’ programme — pulled GM and Ford back from crisis, with sales spiking 30-40 per cent in the quarter following the implementation. In Germany, such an initiative boosted growth to 40 per cent.

“If we take 1990 as the base year, there are around 37 lakh commercial vehicles (CVs) and 52 lakh passenger vehicles (PVs) eligible for voluntarily scrappage. As an estimate, 10 per cent of CVs and 5 per cent of PVs may still be plying on the roads. We still need to see the fineprint to access the kind of incentives that will be on offer,” says Vinkesh Gulati, President, Federation of Automobile Dealers Association.

To put things in context, 2.6 lakh PVs would represent over 10 per cent of cumulative sales in calendar year 2020. For commercial vehicles, 3.7 lakh units would mean more than half the industry volumes of 7.2 lakh units for 2019/20.

Further, a new scheme was also announced under the public-private partnership model with an outlay of ` 18,000 crore for procurement of 20,000 buses. The segment has performed even worse than other categories of CVs in the last few years.