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Scrappage policy: What it will achieve & will it be enough

Thursday, 2nd January


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Commercial vehicles in India run for way beyond what would be deemed acceptable, becoming not only tremendously unsafe towards the end, but also extremely large sources of pollution. Postponing of the scrapping decision, and hence the new purchase decision also hurts the commercial vehicle space in India. The scrappage policy aims to tackle both these issues. In today's post, we look at how this will be executed, how it would benefit the environment and the commercial benefits of the move.


How will it be executed?

While it looks unlikely that the government will ask you to scrap your vehicle directly, the current consensus seems to be around indirectly coaxing you into doing it using a variety of incentives and charges. Two potential ways this could be done are a sharp increase in renewal charges beyond the 15th year clubbed and reduction of toll tax to vehicles that make the switch. This is managed well is likely to convince the truck owner to 'voluntarily' agree to scrap his vehicle.


Next, let's look at both the environmental and commercial benefits of the move


The environmental benefit

Commercial vehicles across the spectrum are guilty of being strong polluters with basic checks and controls for emissions thought of as an unnecessary expense. With time, the environmental damage of these CVs only increases. The environmental upside of the move is thus an important and yet often undiscussed aspect of the move. The fact that most of these would transition from an old diesel guzzler to a BS6 compliant vehicle makes the change even more positive. As pollution levels in India and the globe rise, this will be a small but important step in the right direction.


The commercial benefits

The commercial benefits of the move can be classified into direct and indirect. The direct benefit comes via people who agree to pay the higher renewal fee. While these vehicles will continue to do damage to the environment and pose potential safety risks, they are now charged for this. Finding a way to effective tax entities for such negative externalities (cost suffered by someone else as a result of your transaction; in this case the society as a whole suffers via lower air quality). The next and much more tangible benefit of the move will the increase in sales for commercial vehicle manufactures in India. As owners scrap their older trucks, they will enter the market to buy new ones to continue their business leading to increased revenue for the CV players. Having suffered quite a bit in recent times, this will come as welcome relief for the CV manufacturers. The question however is, will this be sufficient to bring cheer to the sector?


But will it be sufficient to cheer up the sector

It is important to know that the CV sector is going through the worst possible phase it could. In addition to the impact the lack of credit (due to the NBFC crisis) has had on autos as a whole, the slowdown in infrastructure and real-estate is also weighing the sector down. To make matters worse, we are also on the verge of a switch from BS4 to BS6 (stricter emission norms) that has given most people reason to pause and wait for the newer more compliant models. The diesel engines would need a lot of effort to become BS4 compliant, which would in all likelihood lead to a higher cost passed through to the customer, denting sales further. The Finance Minister's recent 102 crore announcement for infra combined with the scrappage policy are certainly positives, but it is important to keep in mind what the sector has gone through and acknowledge that there is still cause for concern, and moves like the state absorbing a part of the extra cost via a BS6 subsidy when the trucks are sold to operators below a certain size as well as more focused efforts to improve liquidity on the NBFC front could be needed to revive the sector.


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