New vehicle scrappage policy may need tinkering

‘Very few CVs conform to age criteria’

March 25, 2018 10:46 pm | Updated 10:49 pm IST - MUMBAI

Old order changeth: The government had estimated 2.8 crore vehicles to be older than 20 years.

Old order changeth: The government had estimated 2.8 crore vehicles to be older than 20 years.

The new vehicle scrappage policy of the Centre is unlikely to have any significant impact on the automobile industry in terms of increased demand, according to rating agencies.

The policy, cleared by the Prime Minister’s Office and awaiting the approval of the GST Council, targets to take polluting vehicles out of the roads and help the automobile industry register higher sales.

The draft policy, released by the Ministry of Road Transport and Highways in May 2016, mentioned about vehicles older than 15 years becoming eligible for benefits under the scrappage scheme but the criteria was reworked with benefits being applicable to vehicles older than 20 years.

The scheme would now come in effect from April 1, 2020, coinciding with the implementation of the BS-VI norms.

“As per our estimates, based on that draft note, 640,000 vehicles would opt for the scheme in the course of three years of implementation,” said CRISIL Research in its policy analysis.

Number of vehicles

“If we look at the various vehicle segments in the commercial vehicles (CV) industry, very few vehicles would actually be older than 20 years in the current vehicular population,” CRISIL Research said in its policy analysis.

“Medium and heavy commercial vehicles (M & HCVs) that typically have a life of 20 years, would be eligible under the scheme.” Under M&HCVs, medium commercial vehicles (16 tonne gross vehicle weight) would benefit the most, while the number of multi-axle vehicles, intermediate commercial vehicles (ICVs), tractor trailers and light commercial vehicles opting for the scheme would be very limited,” CRISIL Research added.

As per the Ministry’s draft on ‘voluntary vehicle fleet modernisation plan,’ vehicles bought on or before March 31, 2005, would be eligible for the scheme and get 50% waiver on excise duty, scrap value of the truck and additional discounts from the original equipment manufacturers.

Analysts said the benefit offered under the scrappage policy would be 15% of the vehicle’s price. But this advantage would be muted as prices of diesel vehicles were expected to rise 10-15% once the new norms (BS-VI) come into force.

“The total population of commercial vehicles that will be older than 20 years in fiscal 2021 would be 50,000 vehicles, much lower than the government’s earlier estimate of 2.8 crore vehicles and our internal estimate of 6,40,000 vehicles,” CRISIL Research said.

“In any case, 70,000 to 90,000 vehicles are scrapped every year. So, we believe the impact of the scrappage policy will be limited. However, the additional benefit from the scheme will prop up commercial vehicle demand to some extent when vehicle prices will increase because of change in emission norms (from BS IV to BS VI),” it added.

ICRA, in its report, said that the proportion of commercial vehicles above 20 years would be one lakh to two lakh units.

“The proposed scrappage policy is unlikely to be materially positive for commercial vehicle demand,” it said.

Shamsher Dewan, vice president and sector head, ICRA said, “Most of these older vehicles are used in rural areas and smaller towns by small fleet operators who operate used vehicles and have limited financial resources to purchase new vehicles.

Moreover, around 70,000 to one lakh vehicles are scrapped on an annual basis. As a result, the potential impact of the proposed policy on commercial vehicle sales will be limited.”

Meanwhile, commercial vehicles sales have seen a rise post demonetisation and GST implementation due to healthy growth in light commercial vehicles (LCVs) and M&HCV. “Replacement demand, improved financing situation and rural uptick is driving LCV sales, while pent up demand post-GST, construction activity and stricter implementation of overloading norms has supported M&HCV sales. Comparatively, the bus segment continues to face headwinds because of weak order from state road transport undertakings,” ICRA said in the report.

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