Vehicle Scrappage Policy to Push Demand for Used CVs

Vehicle Scrappage Policy to Push Demand for Used CVs

According to a latest report released by India Ratings, vehicle scrappage policy will push demand for used CVs as the bottom of the value chain remains financially stricken and thus unable to buy a brand new commercial vehicle

India Ratings and Research (Fitch Group) has released a report on the commercial vehicle industry. As per the report, the vehicle scrappage policy implementation will push demand for used commercial vehicles (CVs) in the country. The policy, however, may not be significant that may lead to demand revival for new CVs in the short term.

The pure success of such policy is dependent successful implementation of incentive structure of the owner who is willing to scrap their old CVs. The report also mentions that the degree of demand for a used CV will very much depend on vintage of CVs considered for scrappage. The overall value chain involved in CV is likely to shrink, thereby leading to increased demand for used CVs and thus its resale value.

A typical new CV with up to five years of age is primarily owned by a large fleet operator. Against this, any CV above 12-13 years life going up to their end-of-life are largely owned by single truck owners or small road transport organisations, stated the report. It is critical to have replacement demand to be generated at the bottom of value chain as CVs aged between 15-20 years need to be scrapped. However, such a segment operates in limited financial resources and very unlikely to buy a brand new CV and opt for a lesser vintage CV. According to India Ratings, it is unlikely for replacement demand to be transient at the top of the value chain in the short-to-medium term.

As many as 1.2 million commercial vehicles would be equal or more than 15 years of age by 2020, which amounts to almost 16 % of total CV operating on the road today. Ironically, just 0.3 mn of the lot having age of more than 20 years will be eligible for scrappage policy. In a scenario where CVs with vintage of 15 years and above are made eligible for scrapping, the impact is likely to be more meaningful in terms of pollution control and catalysing replacement demand than fixing the eligible scrapping age to 20 years and above. India Ratings believes a lower scrapping age of 15 years could lead to a relatively higher replacement demand at the bottom of the value chain than the scrapping age of 20 years.

In light of the current economic slowdown, scrappage policy is unlikely to translate into actual demand, unless backed by adequate incentives for the CV owner to dispose the over aged vehicle. Measures like providing tax benefit to the owner of a scrapped CV to buy a new CV is unlikely to incentivise the owner since according to the value chain the owner may not opt for buying a new CV after disposing the old one. However, if the owner is provided with a tax benefit to buy a used CV instead of a new CV it could lead to an upward migration in the value chain. Hence, Ind-Ra believes the incentive structure should benefit the owner at an appropriate value chain to successfully implement the proposed scrappage policy.