India’s Draft Scrappage Policy May Do Little To Spur Auto Sales

The government’s plan to offer incentives for scrapping vehicles older than 15 years may do little to boost sales at a time the country is facing its worst auto slowdown in a decade.

Buyers will not have to pay registration fees if they dump old vehicles, according to a draft scrappage policy released by the central government last week. The draft, however, doesn’t make it mandatory for users to scrap older vehicles.

But it proposed to charge higher for registration of new vehicles. And suggested increasing the cost of renewing registration of 15-year-old vehicles to Rs 1,500-40,000 depending on the segment, and proposed fitness certificate renewal every six months instead of one year earlier.

RC Bhargava, chairman at Maruti Suzuki India Ltd., however, said the incentives for scrapping older vehicles may not be enough. “Instead, it adds to the stress of the auto slowdown as the new vehicle registration cost has been increased,” the head at India’s largest carmaker told BloombergQuint over the phone. In countries like the U.S. and Europe, he said, the incentive is substantial for users to scrap their vehicles in exchange for new ones.

Indians have been buying fewer two-wheelers, cars and utility vehicles for nearly a year, indicating a consumption slowdown in the economy. Sales at dealerships, measured by new vehicle registrations, too, fell to the lowest in 18 months in June. The slump has also prompted auto and auto parts makers to lay off contract workers and dealers to shut showrooms.

Chirag Jain, auto analyst at SBICAP Securities Ltd., said the draft policy has come as a big disappointment, especially for the commercial vehicles makers who were banking on the scrappage policy. “There’s only a marginal benefit with registration waive-off of new vehicles, but there is no meaningful benefit like with respect to lower good and services tax rates,” he told BloombergQuint during an interaction. This, according to Jain, may not revive the demand.

Shamsher Dewan, vice president and sector head (corporate ratings) at ICRA Ltd., said the draft policy, if implemented, will not boost sales of commercial vehicles, such as trucks. “The proposed policy will have a limited impact on trucks as the number of 15-year-old trucks is not huge,” he said. “More so, they will instead be replaced by second-hand trucks, as the incentive is not huge to spur buying of new trucks.”

India is expected to have 22 million obsolete vehicles, also called end-of-life vehicles, by 2025, more than twofold jump from 2015, the Central Pollution Control Board said in a report.

Puneet Anand, group head (marketing) for Hyundai, said more infrastructure needs to be built before providing higher incentives to customers for scrapping their vehicles. A proper ecosystem like scrappage units, where to keep cars, and how to monetise from the policy needs to be in place first, he said over the phone. “Without ecosystem, it will not make sense for state governments to provide huge incentives.”