New vehicle scrappage policy draft issued: Why it may not revive demand for CVs

While the Cabinet is evaluating to introduce a vehicle scrappage policy, a research note suggests that it may not revive the demand for commercial vehicles.

By: | Published: October 16, 2019 11:16 AM

The Ministry of Road Transport and Highways has issued a fresh new draft for Vehicle Scrappage Policy which will enable setting up vehicle scrapping facilities in India. The draft states the minimum requirements for a scrappage facility would be required to meet in order to be authorised in terms of collection and dismantling of vehicles under the guidelines stated by the Central Pollution Control Board.

While the draft policy has been issued by the ministry, it is welcoming comments from shareholders on the same till November 15. These guidelines for vehicle scrapping as stated by the ministry is to help preserve and protect the environment and create a legal and regulated vehicle dismantling and scrapping industry.

The policy will consider vehicles that do not have valid registrations and owners are looking to scrap their vehicles voluntarily or vehicles impounded by authorities. The facilities will have to abide by the regulations set by the CPCB and will be required to set up a large area and must have radioactive detection equipment. They will be allowed access to the VAAHAN database and for the workforce, they will also be required to meet the labour laws which include minimum wage, provident fund (EPF) among other guidelines. In addition to the guidelines set by the ministry and the CPCB, states will have the freedom to include any additional guidelines they deem necessary.

Under the guidelines, car manufacturers will be able to set up authorised vehicle scrapping facilities which the government feels will help boost sales of the auto industry in India.

However, PTI reports that a research note suggests that the policy may not have a beneficial impact on the demand for the commercial vehicle industry in the short term. The study conducted by rating agency Ind-Ra shows that if commercial vehicles over 15 years and above were made eligible for scrapping, the impact is likely to be more meaningful in terms of pollution control and catalyzing replacement demand than fixing the eligible scrapping age to 20 years and above.

"The vehicle scrappage policy, on implementation, would improve demand for used commercial vehicles (CVs) but not contribute meaningfully to revive demand for new CVs in the short term," the research note added.

According to the rating agency, as per the typical CV value chain, CVs aged above 12-13 years till the end of their life are owned by small road transport organisations or single truck owners, while new CVs with a vintage of four-to-five years are owned by big fleet operators.

"If CVs aged above 15 or 20 years are to be scrapped, then replacement demand would be generated at the bottom of the value chain. However, owners of such old CVs are unlikely to buy a new CV due to their limited scale of operations and financial resources. They would rather opt for a used CV of a lesser vintage," it added.
Therefore, the replacement demand would migrate from the bottom towards CVs with a vintage of 10-12 years, firming up their prices, it said. As per the note, approximately, 1.2 million registered CVs would be equal to or older than the age of 15 years by 2020, constituting about 16 per cent of the total on-road CVs.

Contrarily, around 0.3 million or 5 per cent of the total on-road registered CVs would be eligible for scrappage policy for vintage limit of 20 years and above, the note said adding it is possible that many of these are already scrapped due to wear and tear; hence, the actual proportion of on-road CVs with vintage greater than or equal to 20 years could be less than 5 per cent.

Which is why the agency suggests that a lower scrapping age for CVs of 15 years could lead to a higher replacement demand that it would with a scrapping age of 20 years.

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