Vehicle scrapping policy: Insufficient incentive unlikely to trigger replacement, says Jefferies

The vehicle scrapping policy, proposed in Parliament last week, is unlikely to make people junk their old vehicles for new ones in a big way, owing to insufficient incentives offered by the government for replacement, a report said on Monday.

Under the proposed policy, a scrapped vehicle will be offered a monetary value close to 4-6 per cent of the showroom value. There could even be up to 5 per cent discount on the purchase of a new vehicle if a scrap certificate is produced.

In addition, it also offers a 25 per cent discount in road tax, among others.

It also proposes to de-register vehicles that fail fitness tests or are unable to renew registrations after 15-20 years of use.

“While the scrapping policy has the right intent, we believe the incentives are insufficient to trigger much replacement,” financial services firm Jefferies said in its report on Monday.

It said a vehicle owner can usually get scrap value of about 2-3 per cent of vehicle price in the market and hence the incremental incentive from the policy appears minimal.

“We also believe the original equipment manufacturers (OEMs) are unlikely to offer additional discounts at a time when demand is already recovering and companies are facing severe margin pressure due to elevated commodity prices,” it added.

The policy proposes to deregister commercial vehicles (CVs) after 15 years and private vehicles after 20 years of use, if these fail the fitness test or are unable to renew registration certificates.

As a disincentive measure, the policy suggests an increase in fees for fitness certificates for CVs and re-registration for private vehicles after 15 years of use.

Mandatory fitness testing for heavy CVs is expected to start from April 2023 and for other categories from June 2024.

The draft notifications are expected in the next few weeks and will be in public domain for stakeholder feedback for 30 days, according to the report.

As per the government, around 1.7 million medium and heavy commercial vehicles and around 5.1 million light motor vehicles are older than 15 and 20 years, respectively.

“This appears significant versus our FY22 new vehicle sales estimate of 259 thousand units for M&HCVs and 3.3mn units for PVs,” the report stated.

However, the firm believes a large proportion of these older than 15-20 year vehicles are not in active on-road use and the owners would not have the financial capacity to replace these will new vehicles for mid-single-digit incentives.