On February 1st, the Union Finance Minister Nirmala Sitharaman presented the Union Budget for the financial year 2021-22. One of the key highlights of this year’s Budget announcements was a voluntary vehicle scrappage policy purported to phase out old and unfit vehicles to control pollution, reduce emissions, and drastically cut down on India’s growing oil demand.
The Finance Minister explained that the aim behind the scheme was to encourage “fuel-efficient, environment-friendly vehicles, thereby reducing vehicular pollution and oil import bill.” She said the vehicles would undergo fitness tests in automated fitness centres after 20 years in the case of personal vehicles, and after 15 years in the case of commercial vehicles.
As per the scheme, the government vehicles older than 15 years need to be replaced by new vehicles, while the private vehicles need to either follow scrapping voluntarily or under undergo a fitness test. The government will also issue guidelines on setting up scrapping centres and automated fitness centres for this purpose.
Nitin Gadkari, Union Minister, Ministry of Road Transport & Highways (MoRTH), in a press conference recently declared that the details of the vehicle scrapping policy will be announced within 15 days.
In May 2016, the government had floated a concept note on Voluntary Vehicle Fleet Modernisation Programme (V-VMP), proposing to replace 28 million vehicles bought on or before 31st March 2005 with the resultant impact of benefiting the environment and ensuring that the replacement vehicles were BS-IV compliant. Monetary incentives were proposed for vehicle owners shredding their old vehicles in the form of scrap value from old vehicles, automobile manufacturers’ special discount and partial excise duty exemption.
The new vehicle scrapping policy is a progression from the draft V-VMP and aims at encouraging fuel-efficient and environment-friendly vehicles to replace older vehicles. It is estimated that the policy would cover over 10 million light, medium and heavy motor vehicles, which cause high pollution compared to the latest vehicles.
While the move will lead to fresh investments of around Rs 100 billion, it is expected to create as many as 50,000 jobs. Apart from stimulating investment, the scrapping policy would also lead to recycling of waste metal, improved safety, lower air pollution, reduced oil bills (due to greater fuel efficiency).
Mr. Gadkari also claimed in the aforementioned press conference that the scrappage policy would lead to a reduction in air pollution emissions by 25 percent. On the other hand, with incremental demand for new vehicles, India’s automobile industry is expected to grow by over 25 percent to Rs 6 trillion from the current level of Rs 4.5 trillion over the next two years.
The implementation – A carrot & stick approach on the cards
While the government has several options in terms of the detailed policy framework and its implementation, in all likelihood, the scrapping policy would be a mix of penalties and incentives. The government might consider waiving off registration charges on new vehicles to incentivize scrapping and ask states to provide a rebate on road tax. Further, the original equipment manufacturers (OEMs) might be asked to give some discounts to the customers who agree to scrap their old vehicles. The states may be allowed to use the green tax revenue to provide a rebate on road tax. On the other hand, the government could simply hike the cost of registration renewal for all vehicles older than the specified years.
A step in the right direction
The vehicle scrapping policy is an initiative that was long-awaited. It’s a step in the right direction and a positive development for the automobile industry. The move would benefit all automobile segments, while the M&HCV bus segment would be the key beneficiary as the major chunk of bus sales comes from state transport corporations, which are under the control of respective state governments. Thus, we see Ashok Leyland as the key beneficiary of the scheme, as it is the market leader in the M&HCV bus segment. Moreover few ancillary companies catering to M&HCV segments like Bharat Forge, Jamna Auto, Automotive Axle would be also benefitted.
Author: Mitul Shah, Head of Research, Reliance Securities
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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