India finally gets a long-awaited scrappage policy

In her Budget on Monday, Finance Minister Nirmala Sitharaman gave India's auto industry its much-awaited vehicle scrappage policy. “We are separately announcing a voluntary vehicle scrapping policy to phase out old and unfit vehicles. This will help encourage fuel-efficient and environment-friendly vehicles, thereby reducing vehicular pollution and oil import bills," she said in her presentation.

The proposed policy will be based on certain fitness tests. The life of private vehicles has been set at 20 years, while for commercial vehicles, it's 15 years. Further details are awaited from the Ministry of Road Transport and Highways and are expected to be out in the coming weeks.

Currently, 51 lakh vehicles in the country are over 20 years old and are, therefore, eligible to be scrapped, which could in turn significantly reduce vehicular pollution, especially in urban centres. The scrapped vehicles, once recycled, can also act as a source of raw material for other industries.

Right after the Budget, Union Minister Nitin Gadkari said that the proposal for the scrappage policy has been sent to the government for approval. The policy would apply to central and state government-owned vehicles from April 1, 2022.

Once effective, the policy will also help boost sales of new vehicles. This is bound to be welcome news for India's ailing auto sector which is in the grip of a slowdown for past two years. Tata Motors' CEO and MD, Guenter Butschek, calls this Budget a "progressive statement of intent and action that aims to both stimulate and sustain growth following an unprecedented year".

"For the automobile sector, which is a significant contributor to India’s GDP, there are multiple welcome announcements including a voluntary vehicle scrapping policy to phase out old and unfit vehicles, augmenting public transport system in urban areas, continuing focus on adoption of cleaner fuels, and enhancing outlays for developing road infrastructure and expanding the Swachh Bharat Mission," Butschek says.

Other auto companies, too, saw it as one of the ways to accelerate demand growth in the auto sector. "The Union Budget augurs well to create capacity for development and growth in the country. Increased outlays in the road sector, infrastructure development, and introduction of the voluntary vehicle scrappage policy will not only create a safer and environment-friendly auto sector but also drive replacement demand in the sector," points out Gurpratap Boparai, managing director, ŠKODA AUTO Volkswagen India.

Boparai, however, cautioned that it was important to remember that, even in the coming financial year, the passenger vehicle market is unlikely to reach the level of 2018 and the much-required rationalisation of GST and cess to aid the auto industry was missing.

What's bothersome for the automakers is also the fact that customs duty on some vehicle parts has been increased and this might lead to an added cost of ownership. "The increase in customs duty on certain auto parts to 15% will further increase input costs and prices for cars which depend on specialised components which cannot be manufactured locally due to unviable volumes," Boparai argues.

ACMA, the industry body representing India’s auto components sector, argued that this is in tune with India's push for an Aatma Nirbhar Bharat. "Increase in basic customs duty on select auto components will encourage local manufacturing of such items. It is also heartening that the Budget outlay for the MSME sector has been doubled compared to last year. The auto components industry is dominated by MSMEs and this will provide them the necessary succour as the industry recovers," says Deepak Jain, president, ACMA.

Jain is optimistic that a continued focus on building rural and agricultural infrastructure and prioritising agriculture credit growth will have long-term positive impact on the rural demand for vehicles.

Sitharaman in her speech also mentioned that the scrappage policy will help promote fuel-efficient and environment friendly vehicles while reducing India's huge import bills. "The proposed scrappage policy says that if a vehicle fails the fitness test more than thrice, it might be subjected to mandatory scrapping," she said during her Budget speech.

The policy is also expected to generate more employment opportunities in addition to boosting vehicle sales. Droom's founder and CEO Sandeep Aggarwal agrees.

"The vehicle is among the top three big-ticket items for any human being and larger economic life for it only means better ROI for the users. This also means the used automobile industry in India will be more robust in decades to come. Government allocation of ₹18,000 crore for infrastructure will certainly boost the automobile industry. Also, India adopting global standards for scrapping vehicles will only create a more holistic ecosystem for the industry. No country has ever achieved economic freedom until it has fully democratised transportation and its reach," he says.

Auto experts argue that the new policy is likely to increase demand for both commercial and passenger vehicles. "Scrappage policy, though voluntary, will likely become mandatory as fitness certificate will be made mandatory... The government will also need to build the necessary infrastructure to get this to action on ground. Strong push in infrastructure—roads, railways, economic corridors—will help boost demand for heavy and medium duty CV’s," says Rajeev Singh, partner, automotive leader, Deloitte India.

Singh, however, argues that without proper infrastructure, just introduction of a fitness certificate may not be enough.

Another industry body, FADA (Federation of Automobile Dealers Associations), too, is disappointed with certain aspects of the Budget. "While we expected disposable income for individuals to increase with enhancement of IT slabs and depreciation benefit on vehicles for individuals, the same has not been taken into consideration. Government’s reduction of customs duty on steel products to 7.5% will benefit auto OEMs. We, hence, expect the benefit to trickle down to end customers, thus, helping in boosting of demand," points out Vinkesh Gulati, president, FADA.

FADA estimates that if 1990 is taken as the base year, there are approximately 37 lakh CVs and 52 lakh PVs eligible for voluntarily scrappage. As an estimate, 10% of CVs and 5% of PVs may still be plying on road. "We still need to see the fine print to assess the kind of incentives which will be on offer and thus have a positive effect on retail," Gulati says.