Driving Optimism in Automotive Industry with New Vehicle Scrappage Policy

Globally, governments have effectively used vehicle scrappage policy as a tool to stimulate auto demand. After the 2008 global financial crisis, countries like USA, Canada, UK, Germany, China etc. rolled out old vehicle scrappage programs and they achieved good results from it.

Updated: Jan 12, 2021 1:30 PM
Budget 2021-22, Union Budget 2021

India has witnessed robust economic growth over the last 2 decades which has led to rapid urbanisation across the country, and urbanisation has further stimulated travel demand which has increasingly been met by private vehicles. It has been observed that the rate of increase in vehicle ownership across the country is higher than the population growth rate. The number of vehicles per 1000 population was 51 in 2001 and it has more than tripled to 222 in 2019(1).

Strong demand exists for End-of-Life Vehicles (ELV)

The average life of a vehicle is envisaged to be 10-15 years, and the increase in vehicular population has also led to an increase in the number of obsolete vehicles [also called end-of-life vehicles (ELVs)]. According to an estimate of the Central Pollution Control Board (CPCB), there were 8.7 million(2) obsolete vehicles, in 2015, and it is estimated that they will further increase to 22 million by 2025.

ELVs which are not in working condition are dumped on roadsides or open plots and they block those spaces. ELVs which are in working condition find buyers (as ‘used’ cars) despite being more polluting and less fuel-efficient than their newer counterparts.

According to Deloitte Research, the used car market in India is about 1.3 times the new car market and it is growing at about 17 to 18 % every year. On one hand, used cars are regarded to be better for the environment since manufacturing of new cars produces additional CO2 and contributes to global warming, while on the other hand, the higher the age of the vehicle (especially ELVs), the less energy efficient it is. Owing to the lack of recycling/ scrappage policy and enforcement regarding the same for old vehicles, the ELVs continue to remain on the roads and create pollution and congestion.

The unorganized industry of vehicle recycling and scrappage is creating pollution

Approximately 65%(3) of a vehicle are metals and the rest are plastic, rubber, glass, etc. Hence, a lot of these materials can be reused if there is proper salvaging. However, the structure of the vehicle recycling and scrappage industry in India is highly unorganized and due to lack of regulations, vehicle scrapping poses risks to public health and the environment. Some of the used vehicles end up in scrap yards, and they use crude and unscientific methods to dispose of vehicles. The vehicles are hammered and dismantled, from which some parts are resold and others generally dumped.

According to a CPCB report(4), parts like non-functional switches, brake shoes, and rubber parts, etc. are disposed of carelessly — releasing asbestos, mercury, and several other pollutants in the environment. Further, liquids like coolant, brake, and hydraulic fluids, etc. are drained on the ground resulting in contamination of groundwater and air.

Considering the issues which ELVs create on-road as well as due to the recycling and scrappage practices, there has been a dire need for a comprehensive and robust policy in India for handling ELVs. And such policy needs to be comprehensive keeping in mind all the key stakeholders like vehicle owners, scrappage industry players, as well as automobile manufacturers.

The Government of India has been cognisant of this fact and they have been working on a new policy over the last few years, with an objective to address the prevalent issues as well as to promote the new clean vehicle technologies like Electric Vehicle. But as the number of ministries(5) involved in determining this policy has been large it has taken some time. However, based on the recent announcement by the Government, it appears that the policy should be finalised very soon.

A balanced policy seems to be on the anvil

Based on the draft note issued by the government, and the discussions and deliberations going on with the industry, the broad contours of the upcoming policy are as follows:

– Vehicles older than 15 -20 years(6) could be considered for scrapping.

– Vehicles crossing their defined End-of-Life will have to undergo fitness certification through an automatic fitness certification test for getting re-registered every 6 months.

– The cost of re-registration is expected to increase many folds from the prevalent rates indirectly dis-incentivising the same.

– Vehicle owners who surrender their old vehicle may be issued with a certificate which can be used to get a discount on their new vehicle or get a waiver on registration/road tax for a new vehicle.

– The vehicle owners who may not opt for buying a new vehicle may be able to trade the certificate in the market for monetary benefit.

In addition to the above, the government is also in process of issuing guidelines for setting up, authorisation, and operating of Authorised Vehicle Scrapping Facility (AVSF). These initiatives in tandem are expected to create the right push-pull factor which is required for organising the otherwise un-organised Vehicle Recycling and Scrappage industry.

Also read: Covid-19 was a black swan event for the CV segment: Tata Motors

Impact on the Auto Industry

Globally, governments have effectively used vehicle scrappage policy as a tool to stimulate auto demand. After the 2008 global financial crisis, countries like the USA, Canada, UK, Germany, China, etc. rolled out old vehicle scrappage programs and they achieved good results from it. Out of all the countries, the scrappage program of Germany was the largest and it has been so till date, and the program not only resulted in an increase in new car sales by about 30-35%(7) for about a year, but it also helped the improving the environment owing to reduced vehicular emissions.

Hence, based on such experiences it can be confidently said that the upcoming policy measures will not only support vehicle owners who didn’t have any incentive so far in scrapping the ELVs but will also benefit the automobile industry in increasing its sales. Some of the envisaged benefits to the auto industry from this initiative are mentioned below:

– With good incentive available for ELV owners, to go for scrappage, the automobile industry which is going through a downturn due to the COVID-19 pandemic may witness a surge in vehicle demand.

– The so-far unorganised industry will transform into an organised one and it offers an opportunity for automobile manufacturers to enter into this segment wherein so far only one Indian Auto Manufacturer has started operating in collaboration with a Public Sector Undertaking (PSU).

– It will generate new job opportunities in the organised automobile sector creating a skilled workforce in the industry.

– In addition to a new business line, recycling of the ELVs offers a big opportunity for producing recycled metal like steel, aluminium, and copper, etc. which will, in turn, reduce their cost of raw material as they shall be procured in-house instead of importing them.

– This opportunity may also become bigger because the Government is also considering the development of a global scrappage hub at Alang, Gujarat which will increase the scale of operations and availability of metals manifold.

While the Government had already lifted the ban on the purchase of new cars by government departments in September 2019, they can further stimulate the auto demand by considering the imposition of a ban on the use of old vehicles (viz. BS2, BS1 or older) by all the Central and State Government Ministries, Departments as well as PSUs which may generate a huge demand for CV’s, PV’s and even 2 wheelers.

However, it is also critical that certain checks and balances are put in place to help achieve maximum benefits from the program. For example, the scrappage incentive should not be used by the vehicle owner to procure a replacement vehicle that is less efficient or more polluting than the current vehicle. This will undermine the environmental benefits expected from the scrappage policy. Also, the best results from such a program are typically seen when the effort is concerted and sustained over multiple years with manufacturers joining in.

1 Source: Transport Research Wing, Ministry of Surface Transport; Census of India and Deloitte Analysis

2 Source: Analysis of the End of Life Vehicles (ELVs) Sector in India, Central Pollution Control Board, August 2015

3 Source: www.metalscraps.co.uk/ news-automobiles-for-recycling-are-about-65-of-steel-and-iron-15.html

4 Source: Analysis of the End of Life Vehicles (ELVs) Sector in India, Central Pollution Control Board, August 2015

5 The ministries involved are Ministry of Steel; Ministry of Micro, Small and Medium Enterprises; Ministry of Heavy Industries & Public Enterprises, and Ministry of Environment

6 15 years for Commercial Vehicles and 20 years for Passenger Vehicles.

7 Source: Synthesizing Cash for Clunkers: Stabilizing the Car Market, Hurting the Environment? By Stefan KlÖßner and Gregor Pfeifer, 2018

Authors: Rajeev Singh, Partner and Automotive Leader, Deloitte India & Saket Mehta, Associate Director, Deloitte India

Disclaimer: The views and opinions expressed in this article are solely those of the original author. These views and opinions do not represent those of The Indian Express Group or its employees.

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