Scrappage policy may need more incentives to fetch desired results: analysts
- While the intention behind the policy is right, analysts say the incentives are insufficient to trigger much replacement
The government's proposed vehicle scrappage policy, meant to incentivize the phasing out of old and polluting vehicles, is expected to also provide benefits to the automobile industry.
The proposed policy, tabled in Parliament, is not only aimed at reducing the number of old and defective vehicles on roads but also to set the basic framework for a formal system of vehicle scrappage. It will reduce vehicular air pollution and also support people economically while buying new vehicles. The move can, in turnboost the demand for automobiles.
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The proposed policy is expected to offer an incentive for scrapping old vehicles in the form of scrap value at 4-6% of the price of a new vehicle. Benefits are also being anticipated in the form of a reduction in registration fees on new vehicles purchased by people who scrap their old vehicles. Even state governments may be pursued to help provide a road tax rebate of up to 25% for private vehicles (PV) and 15% for commercial vehicles (CV) to those opting to scrap old vehicles. Automobile manufacturers may also be advised to offer a 5% discount on new purchases by people scrapping old vehicles.
While all these measures proposed appear positive, analysts remain watchful about the real benefits. The key beneficiaries of the scrappage policy will be CV players, said analysts at Sharekhan.
Analysts suspect whether the incentives likely to be on offer would be adequate to support adoption of the scrappage policy. While the intention behind the policy is right, we believe the incentives are insufficient to trigger much replacement, said analysts at Jefferies India Ltd. A vehicle owner can already get scrap value of about 2-3% of vehicle price in the market and so the incremental incentive from the policy appears minimal, they said.
Further rising commodity prices are placing challenges that may limit the ability of vehicle manufacturers to offer additional discounts when demand is only just recovering and companies are facing severe margin pressure due to elevated commodity prices. Additionally, a large number of older than 15–20-year old vehicles may not be active on roads and their owners would not have the financial capacity to replace them with new ones for mid-single-digit incentives, said analysts.
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