Breaking it down: Mandatory or not, that’s the question

Nagesh Kumar, a 59-year-old employee at a private firm in Hyderabad, is in a fix over the vehicle scrappage policy announced in the Union Budget. Kumar has a 14-year-old car, which is close to its permitted 15-year licence period. It must now undergo the mandatory fitness test after payment of green tax, before it is approved for use for another five years.

The vehicle is in good condition, but its value is down to ₹50,000. Should he dispose of it or seek a five-year extension? Alternatively, must he go in for a new vehicle and avail himself of the incentives the government has promised but is yet to detail.

Kumar is one among thousands owning an old car. They, along with automotive experts, are keenly awaiting the fine print of the government policy, which suggests that scrapping is a “voluntary” decision (see also ‘Truck owners slam green tax proposal’).

But those in the know believe that it will become mandatory, as most old cars are likely to fail the fitness test. Notes Rohan Rao, Partner, Industrials and Automotive, KPMG, India: “The government is trying to test drive the policy by making it voluntary for now. This will give them time to receive feedback from stakeholders and remove the chinks before making it mandatory. The government has already made scrapping mandatory for vehicles used by its departments and public sector undertakings (PSUs). This policy would apply to central and state government-owned vehicles effective from April 1, 2022.”

The fine print

Experts agree that scrapping old vehicles is the way forward. It is widely acknowledged that the scrappage policy will help reduce air pollution in urban areas. Experts like Rao say older vehicles are nearly 12 times as polluting as newer ones. Replacing older vehicles is expected to reduce vehicular pollution by 25 per cent.

However, experts call for clarity on the incentives for those who retire old vehicles and buy new ones. Welcoming the policy, Rajesh Menon, Director General, SIAM, says: “We await details, as the industry had requested for an incentive-based policy for it to be effective. Union Minister Nitin Gadkari had hinted it will come out in a couple of weeks.”

“There could be rebates on the goods and services tax, road taxes and registration fees. The Centre is also expected to ask the OEMs [original equipment manufacturers] to offer a discount for customers who scrap their vehicles,” adds Rao.

The consensus is thatthe government must involve the auto industry and experts to put in place a robust incentive policy and infrastructure.

Green tax

Says Rajeev Singh, Partner, Automotive Leader, Deloitte India: “The road-worthiness certificate is going to be a challenge for the government. It will have to take three steps: First, ensure the road-worthiness certificate is enforced strictly. Second, enforce an extra green tax on older vehicles. And there should be an inducement offered — some financial gain when people exchange vehicles. A combination of the three will work.”

But will a green tax serve as an adequate deterrent? Opinions are divided. Souvik Bhattacharjya, Associate Director, Integrated Policy Analysis Division, TERI, thinks not. “I feel the scrappage policy should be made mandatory. The incentive can be differentiated based on what the consumers are purchasing. While some amount of incentive can be provided to consumers opting for BSVI vehicles, additional incentives can be provided to those opting for electric vehicles. This should be over and above the benefits provided to electric vehicles under the FAME 2 scheme,” he says.

Scrap right

But along with the green tax and incentives, experts say there is a need to develop scrappage as an independent industry. Rao says many OEMs are exploring vehicle scrappage as an industry as it can help reduce their raw material cost and price vehicles competitively for domestic and export markets. “The country’s infrastructure is not enough to handle scrapping/recycling of millions of vehicles. Recycling is primarily handled by informal small-scale outfits. It will require organising scrapping centres compliant with state pollution standards,” he says.

Meanwhile, all eyes are on the upcoming announcement on the policy framework.