By R Sridhar
One of the most prominent talking points after the Union Budget 2021-22 is the official announcement of a vehicle scrappage policy. The details of the policy are still awaited. But the fact is that a long-standing demand of the commercial vehicle industry for the scrapping of old vehicles has been accepted by the Government.
This follows closely after the announcement of a green policy to scrap the government and public sector vehicles older than 15 years.
The sale of commercial vehicles is cyclical — it moves in tandem with the general economic growth, albeit with a small lag. Under the voluntary vehicle scrappage policy, personal passenger vehicles which are over 20 years, and commercial vehicles that are over 15 years will have to undergo fitness tests.
Although little is known about the modalities of implementation, we have been hearing about a PPP model wherein the government will set up “automated fitness centres” in partnership with private enterprises. Like the Voluntary Retirement Scheme (VRS) for employees, this is the VRS for vehicles across the country.
The average age of the commercial vehicles plying in India is over 10 years. A successful modernisation effort has the potential to bring down the average age to around 5-6 years which will be in line with the economically advanced countries.
The average age of the commercial vehicles plying in India is over 10 years. A successful modernisation effort has the potential to bring down the average age to around 5-6 years which will be in line with the economically advanced countries.R Sridhar, Executive VC and CEO of IndoStar Capital Finance
There are approximately one million commercial vehicles in India, which are more than 15 years old. Scrapping them will create replacement demand and modernise the commercial vehicle fleet in the country. The replacement demand will be nearly 1.5 times the average annual sales of new commercial vehicles. The market potential is an addition of approximately USD15 billion to the sales of new commercial vehicles.Replacement chain
This is how the replacement demand will be generated: the owner of the 15-year-plus truck uses the scrap value and the discount warrant as his equity to take a loan to buy and upgrade to an 8-year-old truck. This sets a chain of action that moves upward. The seller of the 8-year-old truck uses the cash consideration and discount warrant to purchase a 4-year-old truck. In turn, the owner of the 4-year-old truck approaches a vehicle manufacturer with the cash consideration and discount warrant as part of his equity to buy a brand-new truck. In this way, scrappage and modernisation happens simultaneously.
However, a key component of the policy will also be the sustenance of this replacement demand. The development of a sustainable replacement demand requires a comprehensive end of life policy for commercial vehicles that understands changes in the application of a truck through its life cycle, the economics of each application-user segment and the role of used-truck finance.
A sustainable end of life policy for commercial vehicles should have appropriate incentives for scrapping, the development of agencies to handle scrapping which can also issue discount warrants in lieu of voluntary scrapping, and the creation of a commercial vehicle modernisation fund.
The above model illustrates an excellent win-win ecosystem for handling replacement demand for and modernisation of commercial vehicles. It is not only sustainable but also extremely fair and transparent for all stakeholders.
A sustainable end of life policy for commercial vehicles should have appropriate incentives for scrapping, the development of agencies to handle scrapping which can also issue discount warrants in lieu of voluntary scrapping, and the creation of a commercial vehicle modernisation fund.R Sridhar, Executive VC and CEO of IndoStar Capital Finance
Beneficiaries
The biggest beneficiaries of the huge replacement market will be vehicle manufacturers, ancillaries and vehicle financiers. The vehicle VRS is meant to solve three critical problems: reduce national pollution levels; bring down the oil import bill; and provide the much-needed fillip to the automotive sector.
This policy will be pivotal to the government efforts to position India as a global automobile manufacturing hub. It will also benefit the global automakers with manufacturing industries in India and spur adoption of electrical vehicles.
The nation’s logistics infrastructure is likely to see a tremendous boost in the form of reduced travel time and safer national corridors.
This will also help remove the old vehicles from the roads (modernise the fleet) and send them to the scrap yards where these end of life vehicles will be dismantled and what’s useful will be salvaged for recycling and use elsewhere.
The bottom line
I am certain that the success of this policy depends on the active participation of every stakeholder in the ecosystem – transporters, manufacturers and financiers. The used vehicle financier stays with the vehicle during its application-user and ownership change through its life cycle.
Overall, this policy announcement is a very welcome step by the government and is a harbinger of many more reforms in New India.
(The author is the Executive VC and CEO of IndoStar Capital Finance. Views are personal.)
