Scrappage policy to give fillip to automobile industry volumes: ICRA

Vehicle Scrappage policy will provide a fillip to automotive industry volumes and spur demand for new vehicles, rating agency ICRA said on Friday.

The voluntary vehicle scrapping policy announced in the Union Budget for 2021-22 provides for fitness tests after 20 years for personal vehicles, while commercial ones would require it after the completion of 15 years.

"The Government of India announced the much-awaited scrappage policy yesterday, which along with several other supporting measures announced over the past few months, is expected to progressively remove unfit vehicles from the road. This would simultaneously spur replacement demand in the ecosystem, thereby augmenting new vehicle demand as well," ICRA said in a statement.

As announced by the Finance Minister during the Budget speech in February 2021, the policy would be voluntary in nature.

The mandatory fitness test requirement would be applicable for heavy commercial vehicles from April 2023 and for other vehicles progressively from June 2024.

Shamsher Dewan, Vice President and Group Head Corporate Sector Ratings, ICRA said: "The much-awaited scrappage policy is expected to provide a fillip to the auto industry volumes, and has potential to realise multiple other benefits such as reducing pollution and oil imports, reducing raw material costs through metal recycling, fleet modernisation etc."

However, setting up of necessary infrastructure for scrapping and further clarity on the valuation of the scrap value of the vehicle, trade ability to scrap certificate etc. remain key for successful implementation and realising the true potential of the policy, he added.

ICRA estimates that the population of vehicles older than 15 years would be 1.1 million units by the financial year 2024, offering significant potential for scrappage.

"However, given the nature of the usage of such vehicles, the actual scrappage potential could possibly be lower. Nevertheless, even if a proportion of these vehicles get scrapped, it can offer a fillip to volumes by spurring replacement demand and support the industry out of its trough. ICRA estimates that even with 15-20 per cent conversion, it can provide a 20-25 per cent upside to industry volumes in FY2024," the statement said.