Scrappage policy can be more attractive

Announcing a ‘voluntary’ vehicle scrappage policy in the Lok Sabha on March 18, Union Minister Nitin Gadkari listed its numerous benefits, such as doubling the turn-over of the Indian automobile industry from the present Rs 4.5 lakh crore to Rs 10 lakh crore, the salutary effect on environment due to mitigation of vehicular pollution, a reduction in fuel consumption and fuel import bill, job creation, increased safety on the roads, reining in input costs for industries such as automobile, steel, electronics, etc., increase in GST collection, and so on.

Currently, there are 5.1 million vehicles in India which are more than 20 years old, 3.4 million that are between 15 and 20 years old, and 1.7 million vehicles older than 15 years but without renewed fitness certificates. Based on the premise that vehicles older than 15 years are considered to be more polluting and less fuel efficient, the policy architecture is founded on two major pillars: incentivise owners of such vehicles to scrap, and dis-incentivise holding on to such vehicles.

The vehicle-owner who opts to scrap will get 4-6% on the ex-showroom price of a new vehicle as compensation (call it ‘scrap compensation’); 5% discount on the purchase of the new vehicle; and rebate on road tax @25% for a personal vehicle (given that states generally collect this tax @4%, the 25% rebate amounts to 1% of the ex-showroom price of the new vehicle). The policy also moots waiver of registration fee for the new vehicle purchased against the scrapped vehicle.

As for the disincentives for holding on to old vehicles, the policy suggests a hike in fee for renewal of registration (to Rs 5,000 for a car older than 15 years, up from Rs 600 at present) and fitness certificate renewal fees, stiff penalties for delay in renewals and levy of ‘green tax’ by states. All personal vehicles will have to undergo mandatory automated fitness test after 20 years to ply on the roads (for commercial vehicles, after 15 years). Vehicles that don’t pass the test will be de-registered, declared as ‘end of life vehicles’, and impounded by the transport authorities.

Will this policy package lead to the intended outcome? If the owner goes for scrapping, he is promised a total benefit of 11% on the ex-showroom price of a new vehicle. Against this, he can easily realise at least 15% value by selling the old vehicle. So, many won’t opt for scrapping. Even the 11% incentive on scrapping is not guaranteed. Road tax being a major revenue source for states and given their precarious finances, they are unlikely to give any rebate. As for the balance 10%, the onus is entirely on auto manufacturers. If they don’t oblige, the scale will be further tilted against scrapping.

However, a more likely scenario for a majority of old-car owners is one in which they renew the vehicle’s registration and retain the vehicle. Neither the increased re-registration charge nor the imposition of green tax are enough to deter them from this option. The policy, too, is helpful to them: a non-commercial vehicle will have to go for a fitness test only after 20 years. Vehicles between 15 and 20 years old get their registration renewed without a test.

On balance, therefore, the policy may not prompt owners of aged vehicles to go for scrapping. However, things could look different if the GST Council accedes to Gadkari’s suggestion to exempt new vehicles purchased against scrapped vehicles from levy of GST. At present, cars attract GST at 28%. If this becomes zero, it will encourage people to buy new vehicles. But given the huge revenue implications, this is easier said than done.

Meanwhile, there is an order of the Supreme Court (2015) validating a National Green Tribunal (NGT) directive that prohibited petrol vehicles older than 15 years from plying in the National Capital Region (NCR) (for diesel cars, the threshold is 10 years). This order is not just a negation of the extant policy which provides for registration renewal on completion of 15 years from the date of first registration but also presumes that all such cars are unfit for plying.

Even as the policy lays emphasis on fitness, rather than the age of a vehicle, and is structured around incentives/disincentives, the court order militates against this. In fact, the order renders the policy infructous in so far as NCR is concerned. It also creates an anomalous situation whereby vehicle owners in other states have a choice (scrap versus retain or re-sale), but those in NCR are forced to scrap their aged vehicles or resort to desperate sale.

The Centre needs to amend the Motor Vehicles Act (MVA) to reflect the policy intent, i.e., using fitness as the sole criterion – irrespective of its age – to determine whether a vehicle should be allowed to ply on the road or not. As regards scrapping of old and making way for new, more fuel-efficient, less polluting vehicles, it should make the incentives more attractive. The GST exemption idea could be the way forward.

(The writer is a Delhi-based policy analyst)