Scrappage policy unlikely to lead to sharp rise in demand for new vehicles: Crisil

The Centre’s proposed vehicle scrappage policy aimed at facilitating replacement of old, polluting and fuel-guzzling vehicles with new efficient ones, is unlikely to drive demand significantly, according to rating agency Crisil. It has pointed out that due to two recent changes made in the draft note, the impact of the policy will be limited, and far fewer vehicles will qualify for replacement when compared with earlier estimates.

The policy, which has received the go-ahead from the Prime Minister’s Office, awaits approval from the Goods and Services Tax (GST) Council. The two major changes made to the Ministry of Road Transport and Highways’ earlier draft note, include a change in the age of the vehicles from 15 years to 20 years and implementation of the policy from April 1, 2020, coinciding with the implementation of BS-VI norms.

So, if one looks at the vehicle segments in the commercial vehicles industry, very few vehicles would actually be older than 20 years in the current vehicular population, said a Crisil report.

Medium and heavy commercial vehicles (M&HCVs) that typically have a life of about 20 years, would be eligible under the scrappage scheme. Of the M&HCVs, medium commercial vehicles (16-tonne gross vehicle weight) would benefit the most, while the number of multi-axle vehicles, intermediate commercial vehicles (ICVs), tractor trailers, and light commercial vehicles opting for the scheme would be limited.

Though the benefit offered under the scrappage policy is expected to be about 15 per cent of the vehicle’s price, the effect will be muted as the prices of diesel vehicles are expected to go up by 10-15 per cent once the new norms come into force.

The total number of commercial vehicles that would be older than 20 years in fiscal 2021 would be about 50,000 vehicles, much lower than the government’s earlier estimate of 2.8 crore vehicles and an internal estimate of 6.4 lakh vehicles, it pointed out. In any case, 70,000-90,000 vehicles are scrapped every year. So, we believe the impact of the scrappage policy will be limited.

However, the additional benefit from the scheme will prop up CV demand to some extent, when vehicle prices will increase because of a change in emission norms (from BS IV to BS VI). But, to understand the nuances of the policy further, one has to wait for the disclosure of the final benefits from the scheme and approval by the GST Council, it said.

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