Not the right time for a scrappage policy

N Madhavan | Updated on June 04, 2020

It may not adequately revive demand for trucks, will be costly and have truckloads of social consequences

Ask even the most optimistic among the experts tracking the commercial vehicle industry, they will estimate the demand for trucks at a decadal low. Others see it crashing to 2003 levels. The reason is obvious. The trucking sector is suffering from an unprecedented capacity overhang.

The problems for this industry began long before coronavirus reached Indian shores or for that matter, surfaced in Wuhan. As the Indian economy began to slowdown mid-2018, the demand for trucks came under pressure. What complicated matters was the government’s decision to revise the axle load norms. By allowing trucks to carry higher load, it had enhanced — in one shot — the sector’s load-carrying capacity by 20 per cent. As the economy continued to tank in 2019, utilisation of trucks fell. Consequently, sales of commercial vehicles fell sharply by 29 per cent in FY20. Covid-19 has only made things worse. The industry, which will see another sharp reduction in sales volume in FY21, is in the midst of what looks like the longest ever slowdown in its history.

Under the circumstances, a scrappage policy — something the government has been talking about for a while now, may appear to be the best stimulus for reviving the industry. And most truck makers are actively pushing the government for one. But circumstances on the ground today are such that it would be difficult to frame a scrappage policy that will adequately revive demand for trucks. Even if they manage to come out with one, it will have to be fiscally costly and the chances of it hurting Modi government’s political capital is high on account of the social consequences it will unleash.

The first challenge the policy will face is the age for scrapping of vehicles. The government was earlier toying with the idea of scrapping trucks that are over 20 years old. That may not work as the number of trucks that will qualify for scrapping is too small to revive demand. This would call for scrapping vehicles that are younger, say older than 15 years. Over six lakh units, it is estimated, will qualify under this and is a big enough number, theoretically, to boost demand.

Not an easy task

But scrapping trucks that are older than 15 years is not easy. India is unique in that there are thousands of single truck owner-operators who run their vehicles, typically older than 15 years, in rural areas and feed their family. Scrapping such vehicles will rob them of their livelihood as they cannot afford a new vehicle. Actually, a new truck does not work for them if one considers the cost economics in which they operate. Essentially, they will have to go out of business. Many thousands of them doing so will hurt the government politically.

It is to avoid this situation, suggestions have been made for tradeable certificates. A trucker scrapping his old vehicle will get a certificate which he can use to buy another second-hand vehicle which is younger than 15 years. The advantage of this system is that smaller players stay in business and it also creates a market for second-hand trucks. Bigger players can sell their existing trucks which are less than 15 years old and buy a new one by offering the certificate they got while selling their old truck. But for this system to work there is a need for a formal used truck market like the ones that exist for cars.

The way second-hand trucks change hands today will not help in tracking the transfer of the scrappage certificate. Also, it will not help the buyer realise any incentives that the government may offer over and above the scrap value, say in the form of GST cut.

Even assuming a way is found around this challenge, how willing are truckers to part with their existing vehicles? Today, their business is severely affected. Freight availability is low and so in the truck utilisation. Freight rates have fallen but their biggest cost (diesel) remains the same despite sharp fall in global crude prices. If at all they have avoided delinquency, it is thanks to the moratorium that has been announced. Their biggest worry now is whether business will revive in a manner they can meet their debt obligations once the moratorium ends by August.

In these circumstances, the last thing they want is an increase in borrowings. Without additional debt they will not be able to replace their truck under the scrappage policy. This is assuming that risk-averse NBFCs and banks are willing to lend them in the first place when their cash flows are impaired and are struggling to meet their existing loan commitments.

Incentives needed

So it is not clear if the scrappage policy will be effective in sharply boosting demand for commercial vehicles. What is certain is that it will subject the truck operators to a lot of pain.

It is not just the truck operators who will be pushed deeper into debt. An attractive scrappage policy calls for a significant incentive over and above the scrap value of the trucks. With India rolling out BS-VI emission norms from April this year, cost of new trucks increased by 20 per cent on an average. This shift has also pushed up the second-hand value of BS-IV trucks. So, without a significant incentive (back-of-the-envelope calculations put it at over ₹1 lakh), the policy will fall flat. Can the Central government, which is facing demand from many struggling sectors, afford it today?

Finally, the state-of-the-art scrappage infrastructure which is critical to ensure scrapped trucks don’t find their way back to the roads and are disposed of in a green manner is not in place.

Past governments have tackled earlier downturns in the commercial vehicle sector by cutting excise duties. Compared to that a scrappage policy is a much better way to revive demand as it makes the trucking sector operationally efficient, less polluting (one BS-IV truck pollutes as much as 12 BS-VI vehicle) and more fuel efficient (and cut down India’s oil imports). But conditions on the ground today are inopportune, in terms of timing and will render the policy ineffective.

Published on June 04, 2020

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