Scrappage Policy Benefits for Auto Sector 2021 | RenewBuy

Scrappage Policy Benefits for Auto Sector 2021

In the third Union Budget of the Modi Government 2.0, the Finance Minister, Mrs Nirmala Sitharaman introduced a much-awaited policy for old vehicles  “The scrappage policy”.

Here is what the Finance Minister proposed –

Private vehicles that are aged 20 years and above and commercial vehicles that are aged 15 years and above would have to undergo a fitness test. This test would weed out polluting vehicles so that they can be phased out giving way to newer, environment-friendly vehicles.

This announcement has a two-pronged benefit:

  1. It would help reduce air pollution from polluting vehicles and make the environment better.
  2. Help to boost sales of the automobile sector as new vehicles would be bought to replace old and unfit ones.

What does it mean for the Automobile Sector?

While the Finance Ministry has not yet shared the scheme details, this scrappage policy is expected to make a major impact on India's automobile sector. The President of the FADA (Federation of Automobile Dealers Associations) commented that there are about 52 lakh passenger vehicles and 37 lakh commercial ones plying on Indian roads which are eligible for the scrappage policy 1990 is taken to be the base year. (Source: The Hindu)

Impact of the Scrappage Policy on the Steel Industry:

The scrappage policy would also help cut down the costs of the steel industry which imports about 6 million tonnes of steel scrap every year according to a study conducted by the HDFC Bank. (Source: Economic Times)

As the scrappage policy would increase the recycling of old vehicles, the demand for steel scrap can be met locally boosting the scrap industry and reducing the costs of the steel industry.

Furthermore, the study also estimated that an additional business of recycling plastic and rubber parts can be generated through the scrapping of old vehicles.

How its Benefits Consumers?

For consumers, there have been no specific guidelines except that they would have to forego their old vehicles in lieu of new ones. Industry experts are recommending the introduction of a benefits scheme for consumers who replace their old vehicles with new ones in the form of discounts.

However, such benefits are not currently specified by the Finance Ministry. Consumers can, however, benefit from reduced fuel costs by scrapping their old vehicles. Vehicles that are aged 20 years or more usually have low mileage. They burn considerable amounts of fuel when they are used. Newer models, on the other hand, have been developed as fuel-efficient models that save fuel consumption.

So, as consumers switch to newer, fuel-efficient models of vehicles, they can save considerably on fuel costs.

Another benefit that consumers can avail is on buying an electric vehicle. As per the earlier budget, a new income tax deduction was introduced to allow tax benefits on the purchase of electric vehicles under Section 80EEB. Under this section, if taxpayers avail of an auto loan to finance an electric vehicle, the interest paid for the loan would be allowed as a deduction from their taxable income up to Rs.1.5 lakhs. This deduction was made available from the assessment year 2020 and is available even currently. So, under the scrappage policy, if consumers switch to electric vehicles, they can get the benefit of tax deduction and save on their taxable liability.

Impact on the Environment:

One of the major reasons for introducing the scrappage policy was the harmful impact of old vehicles on pollution. Considering the hazardous air pollution levels, the Finance Minister proposed the scrappage policy to make air-polluting vehicles obsolete. 

As old vehicles go out of use, the pollution caused by them would also reduce drastically. Given the new, environment-friendly vehicles now being manufactured, the phasing out of old vehicles would make air quality better as new vehicles take their place. Moreover, as electric vehicles are slowly gaining momentum, the switch to electric vehicles would also reduce pollution levels.

Impact of Scrappage Policy on the Auto Sector in 2021

Besides the scrappage policy, the auto sector would be benefitted by other announcements too which were made in Budget 2021. Though the benefit would be indirect, it would, nevertheless, drive the turnover of the auto sector of India. These announcements that would impact the Indian auto industry include the following –

  • Development of Roads and Highways

The Finance Minister also proposed enhanced development of highways across India. Under the Bharatmala Pariyojana project, the Government has proposed to award 8500 kilometres of roadways by March 2022. Moreover, an additional 11, 000 kilometres of National Highways are also proposed for construction to boost road connectivity and infrastructure. 
This boost would promote increased auto sales as commuting and travelling between cities and districts would become easier with developed roads and highways.

  • Boost to Public Bus Transportation

This is good news for commercial vehicle manufacturers as the Government has boosted public bus transportation services in major cities across India. An allocation of Rs.18, 000 crores has been made towards augmenting public bus transport services which would put a stress on the demand for public buses. Thus, public bus manufacturers are set to experience gains and increased turnovers under this proposal of the Government.

Both these proposals are set to create an indirect benefit for the automobile industry which is an important part of the Indian economy. On the other hand, the scrappage policy provides direct benefits to the auto industry and is also expected to reduce the oil bill of the Government as old, fuel-guzzling vehicles get phased out gradually.

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