Vehicle Scrappage Policy – A Turn for the Better?

Vehicle Scrappage Policy – Is It Worth the Squeeze?

Today we talk about vehicle scrappage schemes implemented by other countries in the past, how did it fare for them in the aftermath and will it be an effective policy for the Indian Auto Industry?

But first, what is a vehicle scrappage policy?

A vehicle scrappage policy is a government program to promote the replacement of old unfits vehicles with modern vehicles. These policies have the dual aim of revitalizing the automobile industry and eliminating inefficient over polluting vehicles from the road.

Now that you’re caught up, let’s begin!

In order to revive the economy from the extreme repercussions of the Global Financial Crisis of 2007-08, Governments worldwide declared huge economic stimulus packages (just like the one’s announced recently to fight the COVID-19 pandemic).

During this period, Germany became one of the first countries to introduce ‘car-scrapping’ schemes worth 5 Billion € as part of their stimulus package. Citizens owning cars that are older than 9 years were entitled for a scrappage premium of €2,500 when buying a new car. The scheme quickly proved to be a blockbuster and the German auto market boomed with an unanticipated increase in sales.

Other nations like US, UK, China and Japan took a leaf out of Germany’s playbook and implemented scrappage policies offering tax incentives, discounts and payments for trade-ins. Since 2008 most countries with a significant automobile industry chose to subsidize this sector; of the ten biggest car-producing countries in terms of global market share (in 2008), only Brazil and India (until recently) have not yet set up car-scrapping schemes.

• All these vehicle scrapping schemes shared similar objectives. For major car producing countries experiencing recession post the financial crisis, a sharp plunge in demand for vehicles would increase the risk of unemployment for people working in the auto industry and bankruptcies.
• The officially stated policy objectives of car-scrapping schemes were usually –
  1. To provide a boost to demand and immediate support for the car industry (United Kingdom),
  2. For protecting employment in the sector (Spain), and
  3. To aid in the reduction of pollution (Germany).
• Even Finance Minister Nirmala Sitharaman in her Budget speech said that – “We are separately announcing a voluntary vehicle scrapping policy, to phase out old and unfit vehicles. This will help in encouraging fuel efficient, environment friendly vehicles, thereby reducing vehicular pollution and oil import bill. Vehicles would undergo fitness tests in automated fitness centres after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles.”

IMPACT OF THE VEHICLE SCRAPPAGE POLICY

• While car lobbyists commended the vehicle-scrapping schemes as a success story, the end result for such schemes have been varied and diverse for each country.
• In terms of stimulating demand in the auto sector, France and Germany registered a year-on-year increase of 2.4% and 26.1%, respectively in the registration of new cars during the first three quarters of 2009.  However, luxury German automakers like BMW, Mercedes-Benz, and Porsche have had little benefit from the program and may have customers who have opted for cheaper, smaller cars instead. On the contrary, other countries registered decreases initially, however the pace picked up sooner.

• The United States Department of Transportation (DOT) reported that the program resulted in more than 0.6 million dealer transactions submitted requesting a total of $2.877 billion in rebates. At the end of the program Toyota accounted for 19.4% of sales, followed by General Motors with 17.6%, Ford with 14.4% and Honda with 13%.
• As a report accurately states – “The international structure of supply chains diminished the positive impact on domestic car industries and employment in the sector. In addition, over 60% of cars purchased under the German and U.S. scrapping schemes through July 2009 were foreign brands.”
• On the environmental front, United States claimed that the fuel efficiency of the new cars purchased under the program was 58% greater than that of the old cars traded in. The average CO₂ emissions of new cars purchased under the scrapping scheme in the United Kingdom were less than the average emissions of new cars purchased outside the program.

India’s Vehicle Scrappage Policy

• The Union government in its recent union budget 2021 announced their plan to put in place a voluntary vehicle scrappage policy wherein commercial vehicles that are 15 years or older and personal vehicles more than 20 years old can be scrapped.
• Commercial Vehicles sales have been sluggish since the IL&FS crisis and were further exacerbated by the Covid-19 pandemic. In particular, domestic sales nose-dived across categories. However, CV segment has started showing signs of recovery from the December quarter (Q3 FY21) as infrastructure/constructions projects have recommenced and gravitating towards normalcy.

• Hence, the primary objective of the scrapping scheme is to amplify demand of heavy and medium commercial vehicles by instating more buses to fulfill urban public transport initiatives as well as trucks to cater to the upcoming ₹1.18 trillion for infrastructure projects.
• This move is certainly expected to benefit big commercial vehicle (CV) manufacturers like Ashok Leyland Ltd, Tata Motors Ltd and Eicher Motors Ltd. In addition, the thrust towards expanding national highway corridors will aid to enhance inter-state connectivity; thereby manifesting a much needed impetus to urban transportation.
• To echo the words of Vipin Sondhi, MD & CEO, Ashok Leyland (from an article in livemint.com) – “The commitment to augment our country’s road infrastructure with projects for building 8,500 km of highways and economic corridors augurs well for surface and road transport. The ₹18,000-crore scheme to augment public transport in urban areas with the addition of 20,000 new buses in a PPP (public-private partnership) model would ensure cleaner and efficient public transportation and ease congestion.”
• Scrapping of older vehicles is expected to generate fresh demand for new vehicles. Companies like Maruti Suzuki and Mahindra and Mahindra are well prepared for the same and actively investing in organized vehicle recycling and dismantling facilities since the past 2 years.
• If you are curious and wanting to know more about the vehicle fitness test as well as the green tax our union government plans to implement, you can read further on it here.

A Big opportunity for Auto Industry in India

The auto industry contributes 7.5% of India’s GDP and a tremendous 49% of manufacturing GDP with a large economic multiplier impact. The Medium and Heavy Commercial Vehicle segment has been under the weather over the past 2 years. However, the Vehicle Scrappage Policy could be the proper remedy to spur domestic demand, furnishing the much-needed fillip to bring about an effective turnaround. 

Further details of the Voluntary Vehicle Scrappage scheme will soon be announced by the Ministry of Road Transport and Highways (MoRTH) and our fingers are crossed.