Scrappage scheme in India can boost CV sales by 65%: CRISIL Research

The Voluntary-Vehicle Modernisation Programme (V-VMP) announced by the Ministry of Road Transport & Highways (MoRTH) can boost commercial vehicle (CV) sales volume by a cumulative 65% (over sales in fiscal 2016) between fiscal years 2018 and 2020, an analysis by CRISIL Research shows.

A total of 680,000 CVs worth Rs 66,500 crore were sold in fiscal 2016; the V-VMP scheme could lead to incremental sales of 440,000 CVs, primarily M&HCVs, worth around Rs 66,000 crore.

In addition, around 200,000 CVs would get scrapped and replaced in the normal course through the three fiscals, given the current junking rate of around 67,000 CVs annually. Hence, total vehicles opting for the scheme would be 640,000.

More than 85% of the incremental sales would be of medium and heavy trucks because of their lifespan of around 20 years. This means many of them bought before the March 2005 cut-off date for the V-VMP scheme would still be plying. 

Intermediate commercial vehicles and tractor-trailers, too, have a similar lifespan, but those purchased before March 2005 are few in number. Pick-ups, upper-end light CVs and M&HCV buses, which have a lower lifespan of 15-17 years, will have a smaller share in vehicles being scrapped albeit most of them would anyway be scrapped. 

Sub-1-tonne CVs would benefit the least, given that the segment was created only in 2005 and vehicles would have been purchased after the V-VMP cut-off date.

According to Prasad Koparkar, senior director, CRISIL Research, “Based on the equation of current resale value versus benefits offered under V-VMP, we expect trucks that are 13 years old or older opting for it. For trucks newer than 13 years, current resale value is more than the benefits offered under the scheme. In case additional dealer discounts are not offered, cut-off age of trucks opting for the scheme could go to 14 years”

Given that the scrap value offered by the scheme can be availed of by transporters even in the open market, the actual additional benefit in V-VMP would be on account of excise duty and road tax waivers, and some additional dealer/manufacturer discount. However, dealers are already offering 8-10% discount on purchase of new trucks, so further sops would be hard to come by.

Binaifer Jehani, Director, CRISIL Research added: “Transporters scrapping old CVs are not buyers of new CVs, since their business is viable using only an older truck. Considering this, the government needs to either provide a cash discount to those junking old vehicles or make the V-VMP incentive certificate issued to transporters tradable.” 

Large fleet operators (LFOs), who are the main buyers of new trucks, would want to buy such certificates from small operators availing of the scheme. Tradable certificates can be aggregated at the dealer level to be further sold to LFOs. 

Further, a buyer might scrap a medium commercial vehicle (around 35% of vehicles availing of the scheme) and go in for a multi-axle vehicle. This means the buyer could avail of excise duty waiver on a more expensive and less fuel efficient vehicle, which would defeat the purpose of V-VMP. 

The government could consider a cap on the engine cubic capacity differential between scrapped and new CVs bought under the scheme. Alternatively, the government could provide different incentives based on engine cc of new CVs bought versus that of the old one scrapped – or offer lower benefit for higher differential in engine cc.