Budget 2021: What is the voluntary vehicle scrappage policy?
During her Union Budget 2021 speech, Finance Minister Nirmala Sitharaman on Monday announced a voluntary vehicle scrappage policy. The policy could "phase out old and unfit vehicles," thereby reducing emissions, increasing fuel efficiency, and also leading to an increase in demand. Notably, the auto sector has been facing a sharp slowdown since 2019 and the COVID-19 pandemic further exacerbated the problem.
Announcing the policy during her Budget speech, Sitharaman said, "This will help encourage fuel-efficient and environment-friendly vehicles, thereby reducing vehicular pollution and oil import bills." Personal and commercial vehicles will undergo fitness tests at automated centers after completing 20 years and 15 years respectively, Sitharaman said, adding that further details will be shared by the Ministry of Road Transport and Highways (MoRTH).
Automobile sales have been declining since the second half of FY19. The downturn coincided with the bankruptcy of Infrastructure Leasing and Financial Services, which caused a liquidity crisis among non-banking financial companies that are major lenders to the auto industry. Rising fuel and vehicle prices, along with weak consumer sentiment amid an economic slowdown, led to a decline in annual car sales in FY20.
The Society of Indian Automobile Manufacturers (SIAM) has estimated vehicle sales across all categories to decline 25-45% this fiscal. From April to December, passenger vehicle sales fell 16% year-on-year (y-o-y) to 17,77,874 units while commercial vehicle dispatches declined by 37.23% y-o-y to 3,58,203 units.
Sitharaman also announced a scheme to spend Rs. 18,000 crore to improve the public transport system and procure 20,000 buses. Evidently, bus sales had also crashed amid the COVID-19 pandemic. Further, Sitharaman announced a capital investment of Rs. 5.54 lakh crore in developing infrastructure around the country. The move is expected to increase the demand for heavy and medium commercial vehicles.
Rajeev Singh—Partner and Head of the Automotive Sector at KPMG India—told Mint, "The scrappage policy though voluntary will likely become mandatory as the fitness certificate will be made mandatory. In the absence of proper infrastructure, just introduction of a fitness certificate may not be enough." "The government will also need to build the necessary infrastructure to get this to action on ground," Singh added.