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Commercial vehicle scrappage scheme may lead to 65% growth in sales

The ministry has proposed a scheme that envisages various incentives with a cumulative benefit of Rs 5-6 lakh per vehicle for consumers to trade in their old vehicles.

twitter-logoSumant Banerji | February 22, 2017 | Updated 15:57 IST
Commercial vehicle scrappage scheme may lead to 65% growth in sales
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A vehicle scrappage and modernization scheme for 15 year old commercial vehicles in the country that is being formulated by the ministry of road transport and highways may lead to a 65 per cent rise over 3 years. The ministry has proposed a scheme that envisages various incentives with a cumulative benefit of Rs 5-6 lakh per vehicle for consumers to trade in their old vehicles.

These incentives include a Rs 1.5-2 lakh upfront discount by vehicle manufacturers, a tax concession by way of lower excise duty by ministry of finance of Rs 2-2.5 lakh and an interest subvention for financing the vehicle by banks. The ministry had made a presentation to the cabinet secretariat on February 9. For the scheme to be implemented, it also needs to be ratified by the GST council.

"This is one of the ways, to not only spur the growth of the industry, but also curb pollution. According to our estimates, if all 15 year old trucks and buses are scrapped in the country, it will lead to a 65 per cent drop in vehicular pollution," said Nitin Gadkari, Minister for Road Transport and Highways.

An AT Kearney report shows there are 11.2 lakh Medium and Heavy Commercial Vehicles in the country that are more than 15 years old and contribute to 34 per cent of pollution. In all, MHCVs account for 2.5 percent of country's total fleet but contribute over 60 per cent of the air pollution "At the same time it will spur investments and create jobs as it would lead to a one time increase in demand for new vehicles. In the first phase it will be only for 15 year old commercial vehicles and we will lower the timeline as well as expand it to other segments like cars and SUVs."

A study done by CRISIL research says the incremental sales of commercial vehicles due to such a scheme would be 4.4 lakh units worth Rs 66,000 crore between fiscals 2018 and 2020. Further, an estimated 2 lakh vehicle sales would come in based on annual vehicle junking rate of 67,000 units in the three years. "Based on the equation of current resale value versus benefits offered under voluntary-vehicle modernisation scheme, we expect trucks that are 13 years old or older opting for it," says Prasad Koparkar, Senior Director, CRISIL Research.

"For trucks newer than 13 years, current resale value is more than the benefits offered under the scheme. In case additional dealer discounts are not offered, cut-off age of trucks opting for the scheme could go to 14 years."

In 2015-16, commercial vehicle sales in the country stood at 6.8 lakh units. Bulk of the incremental scheme due to the scrappage scheme would be of medium and heavy trucks as their average life span in India is more than 20 years. Trading in of smaller trucks and sub 1 tonne goods carriers would be much less as these are relatively newer vehicle categories.

The scheme does have a few challenges. The economics of road transport in many areas in the country is dependent on low value second hand vehicles and the incentive for such transporters to voluntarily upgrade to a newer model is much less.

"Transporters scrapping old CVs, are not buyers of new CVs, since their business is viable using only an older truck," says Binaifer Jehani, Director, CRISIL Research. "Considering this, the government needs to either provide a cash discount to those junking old vehicles or make the V-VMP incentive certificate issued to transporters tradable."

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