Scrappage policy to drive growth of used cars in the medium term

Nandana James Mumbai | Updated on February 04, 2021

Govt plans to levy Green Tax at 10-25% for commercial vehicles over eight years old and personal vehicles of over 15 years

The voluntary scrappage policy, announced during the Budget, can drive the growth of used car volumes in the medium term as customers start replacing their old cars with younger cars, according to companies and analysts.

The Budgent had proposed a voluntary vehicle scrapping policy to phase out old and unfit vehicles. “This will help in encouraging fuel efficient, environment friendly vehicles, thereby reducing vehicular pollution and oil import bill. Vehicles would undergo fitness tests in automated fitness centres after 20 years in case of personal vehicles, and after 15 years in case of commercial vehicles,” she said.

Also read: Auto sector cheers scrappage policy

The Ministry of Road Transport and Highways gave its nod last week to a proposal to levy a Green Tax at 10-25 per cent for commercial vehicles that are over eight years old and personal vehicles of over 15 years.

Green tax

“The voluntary scrappage policy will, in the medium term, drive growth of used car volumes as customers start replacing their old vehicles with younger cars. Also, the green tax will be a minor disincentive for customers to undertake fitness tests. However, given the voluntary nature of scrappage, it might take some time for customers to understand its benefits and adopt it,” Ashutosh Pandey, MD and CEO, Mahindra First Choice Wheels Ltd, told BusinessLine.

Also read: Ineffective nudge

The effects of the scrappage policy and the green tax will be visible only in the medium to long term, said Amit Kumar, CEO, OLX Autos India. “In the short term, however, it will gradually shift the momentum towards a new inventory of used cars. The scrappage policy will have a trickle-down effect. It will impact the used commercial vehicles sector first and then the passenger vehicles segment.”

‘Fitness certification’

“The demand and attractiveness of used cars are a function of price, availability and utility; but post the scrappage policy, it will also become a function of the valid years left before the due ‘fitness certification’,” said Suraj Ghosh, principal analyst - South Asia Powertrain Forecasts, IHS Markit.

While there will be a push for users to opt for younger cars the customers will need more clarity on the tax and fitness tax requirements before they opt for scrapping over getting the fitness tests done, said Pandey. The impact of the scrappage policy on the pricing of used cars is unlikely due to the voluntary nature of the policy, he said.

“In the case of commercial vehicles, however, there is likelihood of firming up of used car prices if a large number of vehicles more than 15 years old come for scrapping,” said Pandey.

Given that the average period of ownership of used cars is around 4-5 years, there won’t be a massive impact on the pricing of used cars, said Kumar. “Instead, it will enable the supply of younger vehicles in the market which will help in rationalising the prices. Most of the used cars are gradually making their way into organised retail channels such as OLX Autos and there is already a massive price difference between new and used cars hence, the price rise, if any, will be minimal.”

To offset the probable lower prices of older used cars, prices of younger cars could go higher, opined Ghosh.

Published on February 04, 2021

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