Voluntary vehicle scrappage policy unlikely to lure India’s customers in short-term, says GlobalData

Following the news that the Ministry of Road Transport & Highways (MoRTH) of India recently reassured that a formal vehicle scrappage policy for India is being worked upon;

Animesh Kumar, Director of Automotive Consulting at GlobalData, a leading research and consulting company, offers his view:

“Vehicle scrappage policy has been one of the key and long existing demand by automotive OEMs in India. The policy made serious development last year when MoRTH formulated draft guidelines to set up Authorised Vehicle Scrapping Facility (AVSF). The policy later reached Union Cabinet for final approval in February 2020, however, a decision could not be reached back then.

“Automotive industry was reeling with poor sales volumes due to economic slowdown and boosting new vehicle was the key motivation behind the proposal for a scrappage policy.

“Now, due to the COVID-19 outbreak, the situation has become a lot worse for the automotive industry in India. The automotive dealerships witnessed significant decline in footfalls in early March and a complete halt (both production and sales) after the announcement of lockdowns in late March. April marked the darkest hour as the India automotive industry recorded zero sales. The industry now stands in a desperate need for the revival of demand, which otherwise seems tough without stimulus packages and policy reforms.

“The incentive-based scrappage policy, if announced, will act as a major demand booster for the automakers. MoRTH has already laid foundation for vehicle scrapping by hiking fees for renewal of registration certificate of transport vehicles older than 15 years and also increasing the frequency of fitness certificates to every six months instead of once a year. The policy, which will be applicable across passenger vehicles, commercial vehicles, two-wheelers and three-wheelers has potential to remove significant number of vehicles from vehicle parc i.e., vehicle population. According to GlobalData, there were approximately 2.34 million passenger vehicles in India with the age of 15 years and above in 2019.

“Besides boosting new vehicle demand, the vehicle scrappage policy has other obvious advantages such as reduced production costs due to the use of recycled materials, significant decrease in tailpipe emissions and less accidents due to the presence of more fit and roadworthy vehicles.

“While the policy is needed in India and will certainly help in boosting sales, the impact may be visible only in medium to long-term. The vehicle scrappage is likely to be voluntary and thus, is unlikely to succeed in luring customers in the current environment. With the uncertainties around the state of the economy and jobs, customers are likely to stay away from big ticket purchases like property and vehicles. Over 75% vehicles in India are purchased through auto finance and interest rates and penalties are quite steep. Customers will be concerned about the penalties if they are unable to make the payments even for a short duration. Furthermore, it will be interesting to see if the quantum of benefits is lucrative enough for customers to consider vehicle scrappage.

“The implementation of vehicle scrappage policy is justified and is crucial for the growth of the automotive industry. However, policy makers also need to ensure that the OEM-centric policy has sufficient to offer to the customers given the weak customer sentiments and subdued economy.”

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