What ails India’s scrappage policy?

Bengaluru: The National Scrappage Policy was launched by Prime Minister Narendra Modi in 2021, effective from April 2022. However, according to Union Minister of Road Transport and Highways, Nitin Gadkari’s written response to Rajya Sabha, until June 24 this year, little over a lakh of vehicles have been scrapped at registered vehicle scrapping facilities (RVSFs) pan-India - a long way from the policy’s vision of “voluntary scrapping” of approximately a crore of vehicles. 

While the policy may be in line with the country’s ambition to become net zero by 2070, the question is whether it has factored in the ground reality of constrained means and a culture ill-disposed to compliance.

Experts feel the government’s faith in people’s voluntary submission to the policy, is a tad misplaced. They also find the incentives on offer to woo the people inadequate, as also the infrastructure built so far.

The mandate

The scrappage policy stipulates that passenger vehicles over 20 years and commercial vehicles over 15 years that do not pass the fitness test are to be classified as end-of-life vehicles (ELVs) and scrapped. Of course, if a vehicle fails an automated fitness test it can go for one retest after necessary repair and re-inspection, as ordered by the appellate authority.

In the case of commercial vehicles, they have to undergo a fitness test once every two years for the first eight years and every year thereafter. For private vehicles, however, the fitness certificate given during registration is valid for 15 years and renewals thereafter are valid only for 5 years. Starting June 1 this year, all vehicles (in phases) mandatorily have to be tested at an automated testing station (ATS).

Government support

To incentivise the process, the scrap value of ELVs has been set at 4-6 per cent of the ex-showroom price of a new vehicle. On production of the ‘certificate of deposit’ issued by the RSVF, the registration fee for the new vehicle is to be waived off.

State governments have been told to offer discounts on motor vehicles tax (25 per cent for non-transport ones and 15 per cent for transport vehicles). In fact, original equipment manufacturers (OEMs) have been coaxed to give a 5 per cent discount on the value of a new vehicle, on furnishing the scrappage certificate.

According to Gadkari’s Rajya Sabha submission, as of June there were 63 RVSFs and 78 ATS operational across the country. The Centre offered a support of Rs 2,000 crore to the state government for setting up RSVFs in FY23. This was raised to Rs 3,000 crore in FY24.

For their part, 21 states and union territories have announced concessions in their Motor Vehicle Tax. Also, 18 of them announced waiver of pending liabilities on vehicles offered from scrapping.

The folly

“Scrappage benefits can only be availed when purchasing a new vehicle. Customers accessing loan for the new buy will typically have to pay an interest of 10-12 per cent to service it, assuming the new vehicle is priced at Rs 30-40 lakh. If the old vehicle is in running condition and not requiring high maintenance costs or having major technical issues, the owner will be reluctant to dispose of the vehicle,” argued Rajat Mahajan, partner at Deloitte India. 

"This makes proactive compliance very difficult, and hence the government will need to bring stricter controls or enhance the incentives for customers in collaboration with OEMs and other ecosystem players such as financial institutions," he underscored.

Today, according to Deloitte officials, OEMs are offering a discount of just 1.5-3 per cent on the ex-showroom price across passenger and commercial vehicles, contrary to the policy mandate (4-6 per cent). This, due to low sales volume and poor enforcement by the state governments.

What’s on offer fails to make scrapping an old vehicle for a new one appealing, said Hemal Thakkar, senior practice leader and director of consulting at Crisil Market Intelligence and Analytics.

He explained that a new intermediate internal combustion engine commercial vehicle costs around Rs 18-20 lakh.

The discount from OEMs will fetch about Rs 1-1.5 lakh, which would be inadequate to cover the down payment, assuming it to be 10 per cent of the new vehicle price. Even a second-hand vehicle costing about Rs 7-8 lakh is not economically feasible. 

"Until the government revises the incentive structure and makes the policy more mandatory than its current voluntary status, the scrappage will only remain muted. Besides this, we need at least one testing facility in every district to ensure its growth, " Thakkar observed.

Kinjal Shah, senior vice president and co-group head - Corporate Ratings, ICRA Ltd agreed. "Limited network of ATS and RVSF at present, and lack of awareness about the policy amongst the vehicle owners, both PV and CV segments, have made for limited compliance to the vehicle scrappage policy," she noted.

''As per MoRTH, around 1.7 million medium and heavy commercial vehicles are older than 15 years and potentially lack a valid fitness certificate. Given this large number, we expect the scrappage percentage for commercial vehicles to be 20-25 per cent of new vehicle sales and 25-30 per cent for PVs in the coming few years. However, this number may go down if the OEMs pull back their discounts within 1-2 years." Mahajan estimated.

He also did not buy into Gadkari's call to OEMs to get involved in the scrappage process waving the carrot that it would raise their vehicle sales by 18-20 per cent. Mahajan’s math was that while this could yield a 20-23 per cent return on investment, OEMs will have to forgo 1-2 per cent of their margins initially to set up scrappage and testing facilities.

Welcoming the government shifting to linking scrappage to vehicle fitness, rather than age, Shah commended that this would be beneficial to vehicles with limited miles recorded on their odometers and being fit for use despite their age.

Interestingly, several OEMs, such as Maruti, Tata Motors and Mahindra, have already gone beyond exchange offers to provide vehicle scrappage services, irrespective of any new purchase.

But evidently these baby steps will have to pick up speed if the country is to catch up with its net zero ambitions.