India's automobile industry has exhibited phenomenal growth coupled with resilience over the last couple of years. It contributes to approximately 7.5 per cent of the country's Gross Domestic Product (GDP), over 35 per cent of the manufacturing GDP, and generates numerous employment avenues for the nation's youth. 

According to IBEF, the Indian automobile market was valued at $32.70 billion in 2021, and is anticipated to grow at a Compound Annual Growth Rate (CAGR) of over 9 per cent from 2022 to 2027 to reach $54.84 billion. Additionally, the country's electric vehicle (EV) market is anticipated to grow to Rs 50,000 crore ($7.09 billion) by 2025. 

Noteworthily, the Indian government has introduced numerous regulations in the last few years to benefit the automotive sector multifariously. One such initiative is the 'Vehicle Scrappage Policy.'

The Vehicle Scrappage Policy, introduced originally in 2021, is a government-funded programme to scrap and remove old and unfit vehicles and replace them with modern and new cars on Indian roads. Its primary goal is to create an ecosystem for phasing out unfit and polluting vehicles to achieve a lower carbon footprint in the country over time.

According to the Motor Vehicles Act of 1989, commercial vehicles that are older than 15 years and passenger vehicles older than 20 must undergo a fitness test. If they fail the mentioned test, it will be deemed that their longevity as a vehicle has expired. 

Beginning April 1, 2023, fitness testing of Heavy Commercial Vehicles (HCVs) shall be conducted only through Automated Testing Stations (ATSs). For other types of Commercial Vehicles (CVs) and Private Vehicles (PVs), the fitness testing shall also be conducted through the ATS and begin on June 1, 2024. This is part of the efforts by the government to streamline, digitise and bring processes to the regional transport offices. 

A Welcome Move For The EV Sector 

The scrappage policy is anticipated to stimulate green mobility, shift towards environmentally friendly automobiles, and eventually push EV adoption as the country phases out older vehicles. Scrapping the one million commercial vehicles in the country over 15 years old will provide financial incentives for purchasing environmentally efficient vehicles and create replacement demand. Moreover, this will also modernise the country's commercial vehicle (CV) fleet. 

According to a paper by Avendus Capital, the replacement demand will be nearly 1.5 times the average annual sales of new CVs. The market potential can add approximately $15 billion to the sales of new commercial vehicles. 

The Vehicle Scrappage Policy can lend further impetus to pre-owned vehicle demand over the short term as demand and attractiveness of used CVs will also become a function of the valid years left before the due fitness certification.

Following the implementation of the policy, the Indian government has subsequently introduced a 'Green Tax' that citizens must pay to renew their private vehicle registration after the stipulated period of 15 years. The policy's main objective is to establish a framework for gradually phasing out unsuitable and polluting automobiles to reduce the nation's carbon footprint.

Advantages To The Automotive Financing Firms And NBFCs 

According to industry experts, the Vehicle Scrappage Policy has been diligently devised to modernise our roads and boost replacement demand for OEMs and banks and non-banking financial companies (NBFCs). Government reforms in the EV space will first be pushed in cities due to environmental concerns. 

As most city transport happens through light commercial vehicles (LCVs), replacement demand will first come in these automobiles, followed by MHCVs. This shift from internal combustion engines to EV LCVs would benefit NBFCs that will finance these vehicle purchases. 

With a vital increment in the demand for new commercial vehicles, automotive financing NBFCs and banks are poised to witness a significant diversification of their loan portfolio which ultimately will help them increase their revenue and profitability. The pivotal goal of the Vehicle Scrappage Policy is to decrease the prevalence of ageing vehicles, which are frequently connected with increased maintenance costs and failures.

Embracing Green Mobility

One of the significant objectives of the Vehicle Scrappage Policy is the propagation of 'Green Mobility' across the nation. The Indian government is encouraging the incorporation of Green Transportation. Thus, the policy will increase EV sales as compared to ICE and fuel-powered vehicles, and electric vehicles are environment-friendly alternatives. 

The government has advised all automobile manufacturers to provide a 5 per cent discount while selling a new vehicle against a scrapping certificate. For personal and commercial automobiles, states may offer road tax rebates of up to 25 per cent and 15 per cent, respectively. The mentioned policy can assist India in becoming a Zero Carbon Emissions economy by 2070.

Along with FAME-I, FAME-II, and state EV policies, the Vehicle Scrappage Policy is being cited as an effective government initiative to reduce pollution and move towards sustainable energy.

Written by: Karamveer Dhillon, co-founder and CEO, Perpetuity Capital