New Vehicle Scrappage Policy Unlikely To Perk Up Demand Significantly

The much-awaited vehicle scrappage policy has received a go-ahead from the Prime Minister’s Office and is awaiting approval from the Goods and Services Tax (GST) Council. As per the draft policy released by the Ministry of Road Transport and Highways (MORTH) on May 26, 2016, vehicles older than 15 years were eligible for benefits under the scrappage scheme. However, as per the latest update, only vehicles older than 20 years will be eligible to opt for the scheme from April 1, 2020.

MORTH’s earlier draft note on Voluntary Vehicle Fleet Modernisation Plan had proposed that vehicles bought on or before March 31, 2005, would be eligible for the scheme and get 50% waiver on excise duty, the scrap value of the truck and additional discounts from the original equipment manufacturers. As per our estimates based on that draft note, 640,000 vehicles would opt for the scheme in the course of three years of implementation.

As per the latest update, the two major changes made to MORTH’s earlier draft note are…

1. Change in the age of the vehicle from 15 years to 20 years
2. Policy to be implemented from April 1, 2020, coinciding with the implementation of BS-VI norms

According to Crisil Research “If we look at the various vehicle segments in the commercial vehicles industry, very few vehicles would actually be older than 20 years in the current vehicular population. Medium and heavy commercial vehicles (MHCVs) that typically have a life of ~20 years, would be eligible under the scrappage scheme. Under MHCVs, medium commercial vehicles (16 tonne gross vehicle weight) would benefit the most, while the number of multi-axle vehicles, intermediate commercial vehicles (ICVs), tractor trailers, and light commercial vehicles opting for the scheme would be very limited.”

While the vehicle scrappage policy was expected to be implemented in the near term, the government intends to enforce the policy from April 1, 2020, which will coincide with the implementation of BS VI norms. ‘Though the benefit offered under the scrappage policy is expected to be ~15% of the vehicle’s price, the effect will be muted as prices of diesel vehicles are expected to go up by 10-15% once the new norms come into force” says Crisil Research.

“The total population of commercial vehicles that will be older than 20 years in fiscal 2021 would be ~50,000 vehicles, much lower than the government’s earlier estimate of 2.8 crore vehicles and our internal estimate of 640,000 vehicles. In any case, 70,000-90,000 vehicles are scrapped every year. So, we believe the impact of the scrappage policy will be limited. However, the additional benefit from the scheme will prop up CV demand to some extent when vehicle prices will increase because of change in emission norms (from BS IV to BS VI)”.

“Having said that”, Crisil Research says “we await disclosure of the final benefits from the scheme and approval by the GST Council to understand the nuances of the policy further.”

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