Lowering scrapping age for vehicles to have greater impact

According to an India Ratings report, the vehicle scrappage policy would improve demand for used CVs but not contribute meaningfully to revive demand for new CVs in the short term.

Scrapping a 15-year old commercial vehicle (CV) will have a greater impact on the automotive industry than scrapping CVs with vintage of 20 years and above, according to a new report of India Ratings and Research (Ind-Ra). While the Ministry of Road Transport & Highways recently issued a draft guidelines for setting up authorised vehicle scrapping facilities, it does not specify cut-off age for scrapping of vehicle. For age clarity, the industry will have to wait for soon-to-be-announced vehicle scrappage policy.

Ind-Ra report added that the scrappage policy would improve demand for used CVs but not contribute meaningfully to revive demand for new CVs in the short term. “The successful implementation of the plan is dependent on the incentive structure for the owner to voluntary dispose the old CV as well as adequate scrapping infrastructure. The agency believes the overall value chain of CV is likely to contract, thus improving the demand for used CV and consequently increasing its resale value,” said Jinesh Rajpara, Analyst, India Ratings and Research.

As per the typical CV value chain, CVs aged above 12-13 years till end of their life are owned by small road transport organisations or single truck owners, while new CVs with a vintage of four-to-five years are owned by big fleet operators. If CVs aged above 15 or 20 years are to be scrapped, then replacement demand would be generated at the bottom of the value chain. However, owners of such old CVs are unlikely to buy a new CV due to their limited scale of operations and financial resources. “They would rather opt for a used CV of a lesser vintage. Therefore, the replacement demand would migrate from the bottom towards CVs with vintage of 10-12 years, firming up their prices. Furthermore, Ind-Ra believes replacement demand is unlikely to be transient at the top of the value chain in the short-to-medium term, leading to insignificant demand for new CVs,” said Rajpara.

Ind-Ra believes lower eligible scrapping age can be a game changer. In a scenario where CVs with vintage of 15 years and above are made eligible for scrapping, the impact is likely to be more meaningful in terms of pollution control and catalysing replacement demand than fixing the eligible scrapping age to 20 years and above. Approximately, 1.2 million registered CVs would be equal to or older than age of 15 years by 2020, constituting about 16 per cent of the total on-road CVs. Contrarily, around 0.3 million or 5 per cent of the total on-road registered CVs would be eligible for scrappage policy for vintage limit of 20 years and above. It is possible that many of these are already scrapped due to wear and tear; hence, the actual proportion of on-road CVs with vintage greater than or equal to 20 years could be less than 5 per cent. Therefore, Ind-Ra believes a lower scrapping age of 15 years could lead to a relatively higher replacement demand at the bottom of the value chain than the scrapping age of 20 years.

Although the scrappage policy creates a potential for replacement demand, Ind-Ra believes, in light of the current slowdown in the auto sector, it is unlikely to translate into actual demand unless backed by adequate incentives for the CV owner to dispose the over aged vehicle. Also, the direction of the incentives is important. For example, providing a tax benefit to the owner of a scrapped CV to buy a new CV is unlikely to incentivise the owner since according to the value chain the owner may not opt for buying a new CV after disposing the old one. However, if the owner is provided with a tax benefit to buy a used CV instead of a new CV it could lead to an upward migration in the value chain.

Rajpara said, “The proposed scrappage policy, if implemented with the right incentives, could aid in reducing the prevailing excess carrying capacity, largely due to increase in the axle-load limits as old CVs are replaced with used CVs of comparatively lesser vintage.”