In its current form, it is unlikely to remove polluting vehicles off the roads and revive automotive demand
This column, on June 5, 2020 (Not the right time for a Scrappage Policy), argued that the conditions on the ground were not right for the government to announce a policy to scrap old vehicles. It also warned that if the government chose to come out with one now, it will be both costly fiscally (lot of incentives need to be given) and socially (many small fleet operators and single truck owners will be forced out of their livelihood).
In the process, it has lost sight of something fundamental — the raison d’etre of the policy, which is to remove polluting vehicles off the road and use the ensuing demand to revive the automobile sector.
The policy’s “carrot-and-stick” approach is found wanting on multiple fronts. The incentives (scrappage value of 4-6 per cent of the cost of new vehicle, 15-20 per cent road tax rebate, registration fee waiver and a 5 per cent discount from manufacturers while buying a new vehicle) are neither attractive nor the disincentives (higher re-registration fee for vehicles above 15 years and a green tax) punishing. Where the policy fails miserably is that it ignores the economics of the decision making to scrap a vehicle.
Take the case of trucks. Crisil estimates that there are 5.1 lakh vehicles that are over 15 years old in the country. Almost all of these are owned by small fleet operators or single truck-owner/drivers. If they decide to scrap their vehicle, per the policy, they will necessarily have to buy a brand new truck to avail themselves of all the incentives. A BS-6 truck costs a lot for them and their operations are such that a new truck is neither viable nor necessary. Typically, they would trade their 15- or 20-year-old truck for a 10-year old vehicle. But the policy offers incentives only if a new truck is bought. This is because the incentives are not tradeable.
Weighed down by low freight rates and poor load availability today, his ability to even buy a younger used truck, leave alone a new one, is impaired. Getting a fitness certificate in a rural area, however bad the condition of the truck, will not be difficult as long as RTOs are pliable. Thus, operators, who account for 85 per cent of the sector and almost 100 per cent of polluting vehicles, may not opt for scrapping.
As for cars and two-wheelers, the volume of vehicles eligible for scrapping is too low to make any impact either in terms of boosting demand or reducing pollution significantly. Here, too, most would be in rural areas where regulation is lax. With such poor incentives, people will keep running their bikes and cars by paying the higher re-registration cost as their finances are already stretched by the pandemic.
The only segment the policy can see some traction is buses. Most old buses that qualify for scrapping belong to State Transport Undertakings (STUs). By offering their old vehicles as part of the scrappage scheme, STUs get twin benefits — modernise the fleet and electrify it.
However, the financial condition of most STUs is a cause for concern. Even though new ownership models such as gross cost contract (GCC) and mobility as a service (MAAS) have gained acceptance and helped STUs operate new buses with little capital investment, the pandemic has played spoilsport. At least 7 out of 10 STUs have defaulted on these contractual payments and it is not clear if GCC or MAAS operators would be keen to help them now.
The scrappage policy will be able to pill polluting vehicles off the road only if it is revamped significantly. To begin with, it should make scrappage of vehicles older than a certain age mandatory. A well-defined timeline can be drawn up so that all stakeholders prepare for it. In the absence of a cut-off date for de-registration of a vehicle, the resale value of an old vehicle is, today, more than what the scrappage policy offers.
For trucks, the incentives offered for scrapping should be enhanced considerably and made tradeable. A vibrant second-hand truck market, with the help of dealers, must be developed to enable truckers modernise gradually. Over time the threshold for scrapping can be reduced. In the long run, this will weed out inefficient players, without driving a whole lot of them out of jobs, and modernise the fleet, too.
State governments should guarantee or assure payments to GCC and MAAS operators. Only then will the STUs be able to modernise their fleets and shift to electric vehicles.
Another way to drive scrappage is to involve manufacturers. Can they be incentivised to reduce the carbon emission of their fleet on the road? The incentive can be in the form of funding research for electric vehicle. Some out-of-the-box thinking needed here.
Scrappage centres are critical to implement the policy. High-quality scrappage centres have the potential to create a circular economy that will, through re-cycling and re-use, reduce production costs for manufacturers by 3-4 per cent as it happened in Europe. Unless there is visibility of good volumes, investment in high-quality scrappage centres is unlikely.
No doubt, a scrappage policy has its advantages. It can modernise India’s vehicle fleet, make the trucking sector efficient, cut pollution significantly, reduce fuel consumption and, thereby, country’s oil imports. It can also generate demand for new vehicles which will have a cascading effect across the economy. But the Scrappage Policy 2021 will not deliver all this as it impractical. In its present form, it will just remain on paper.