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All you wanted to know about CV scrappage policy

Parvatha Vardhini C | Updated on January 21, 2020 Published on January 21, 2020

A scrappage scheme for commercial vehicles (CVs) is one of the most sought-after measures in the upcoming Union Budget for 2020-21.

What is it?

Scrappage policy refers to the provision of financial incentives to the owners of vehicles to get them to scrap outdated models and replace them with newer vehicles. When it was originally conceived in May 2016 as the Voluntary Vehicle Fleet Modernisation Programme, it was decided that vehicles, mainly trucks, older than 10 years or those below BS IV emission standards would be eligible for incentives if they were scrapped and replaced with new ones. A 50 per cent waiver on excise duty on new vehicles and discounts from the auto manufacturers were envisaged as incentives. In March 2018, the age of vehicles to be scrapped was increased to 20 years and the implementation date was set to April 2020. With this deadline nearing, expectations that the government will come out with the contours of the final scheme in the Budget run high. Draft guidelines for setting up authorised scrapping centres were put out in October 2019. But whether the new scrappage policy will take a completely different shape from the earlier one needs to be seen.

Why is it important?

With the economy in a downturn, new CV sales have been in the grip of a cyclical slowdown for more than a year now. Since November 2018, when the slowdown began, average freight rates in key routes across the country have dropped 14 per cent and monthly fleet utilisation has plummeted 30-35 per cent, according to data from IFTRT (Indian Foundation for Transport Research and Training).

Besides, truck sales have also been impacted by structural issues. Decrease in turnaround time of trucks after GST eased inter-State movement as well as higher freight capacity of vehicles following the revised axle load norms have dampened new truck sales. According to CRISIL estimates, the latter has resulted in the freight capacity of existing trucks rising by 20-25 per cent, equivalent to three years of incremental freight demand. The scrapping of old trucks seems to be a short-cut to expedite a recovery in the CV cycle by bumping up demand for new trucks.

Why should I care?

Ever passed by rickety, smoke-spewing trucks on a road trip? You can look forward to breathing in cleaner air if new vehicles replace these crumbling old ones. Vehicular pollution has been top-of-mind for the government, which has been taking various measures over the last few years to tackle this. The ban on vehicles over a certain age from plying in the National Capital Region, the leap to BS VI emission norms from BS IV and the thrust on electric vehicles have all been directed at combating pollution. As the country transitions to BS VI vehicles from April 1, 2020, a scheme to scrap old trucks will help the sale of new BS VI trucks which have the capacity to drastically reduce emission of particulate matter and nitrogen oxide. That said, much will also depend on safe disposal of old scrapped vehicles, as also the age and number of vehicles scrapped.

For truck owners, a scrappage incentive and subsidy for new vehicles will help compensate for the higher price of BS VI trucks. The better emission norms could help improve fuel efficiency and lighten fuel bills too. As new vehicles have better safety features, road safety is also likely to improve.

If you are an investor, stocks of CV manufacturers and suppliers would get a new lease of life. Given the slowdown, the performance of many stocks has been nothing to write home about. Stocks of finance companies with considerable exposure to CV lending will also benefit.

The bottomline

The earlier the government re-ignites the CV cycle, the better it is for all stakeholders.

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Published on January 21, 2020

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