Scrappage policy: A big business opportunity awaits India

india vehicle scrappage policy
For its scrappage policy, India needs to draw from global best practices as well as from studies conducted by environment ministry and ARAI.

The government announced a voluntary vehicle scrappage policy in the Union Budget 2021. The objective of the policy is to phase out old and unfit vehicles and encourage fuel-efficient, environment-friendly vehicles, thereby reducing vehicular pollution and oil import bill. According to the plan, vehicles would undergo fitness tests in automated fitness centres after 20 years in the case of personal vehicles and after 15 years for commercial vehicles to examine their roadworthiness.

Further to ensure that unfit vehicles are not plying on the road, the government also plans to increase the penalty for violation of the directive. Though the finer details of the scrappage policy are yet to be worked out, it is understood that the government plans to offer financial incentives to the owners of the old vehicles to buy new vehicles.

The proposed scrappage policy is being welcomed by the auto industry as it is likely to boost demand for new vehicles at a time when the industry is struggling with a contraction in sales. The total production in the auto industry in FY2019-20 was 26,362,282 units, compared with 30,914,874 in the previous year, registering a decline of 14.73%. While the sale of passenger vehicles fell by 17.88% during the period, the commercial vehicles segment registered a fall of 28.75%. FY2020-21 began with the lockdown imposed to curb the spread of the Covid-19 pandemic and registered zero production and sales in the initial months. However, the auto sector surprisingly recorded encouraging production trends that may be attributed to the pent-up demand.

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A scrappage policy for India

The Central Motor Vehicle Rules prescribe the periodicity and other related aspects for the grant of a fitness certificate. Earlier, the provisions relating to fitness covered commercial vehicles only. No fitness certificate regime is provided for personal vehicles such as cars and two-wheelers, which is a cause of concern both from safety and pollution angles. The ministry of road transport and highways on July 26 2019 proposed a six-monthly fitness testing for vehicles older than 15 years. The said notification mentioned boosting the sales of electric vehicles (EVs) as the objective of the revised rules. It also proposed that battery-operated vehicles will be exempted from payment of fees for the issue or renewal of registration certificates.

The budget speech by finance minister Nirmala Sitharaman did not mention EVs while announcing the scrappage policy. The objectives listed were more generic like encouraging fuel-efficient, environment-friendly vehicles to reduce vehicular pollution and the oil import bill. It appeared that the government was willing to be more accommodative to the auto industry’s demand for a stimulus to spur sales of vehicles and the scrapping policy for the old unfit vehicles was suggested as a measure to push demand.

The government’s plan of having 30 % EVs on road by 2030 no longer remain the top priority in the light of the sluggish economy. The industry welcomed the scrappage policy that, once implemented, would lead to fitness testing of over one crore light, medium, and heavy motor vehicles. Many of these may require replacement on the new fitness criteria.

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How does a scrappage policy work

The scrapping of unfit vehicles is a time-tested policy adopted with reasonable success by many developed countries to boost sales in the automobiles sector. In the wake of the global financial crisis in 2008, many developed countries implemented a budget scheme to promote the replacement of old vehicles with modern vehicles with the twin aim of stimulating the automobile industry and removing inefficient, polluting vehicles from the road. The United States administration devised a scrappage policy, commonly referred to as “cash for clunkers” as part of a stimulus package. The financial benefit was offered when the new car purchased is more fuel efficient than the old car.

Any vehicle less than 25 years old could be exchanged for a new vehicle and the owner got a credit of up to $4,500. The cash for clunkers was a $3 billion programme, which triggered the sale of 7 lakh vehicles. It generated economic activity to the tune of $25 billion. Other countries like Germany, Austria, Italy, Australia, Japan, and the UK also announced similar schemes around the same period. However, all these programs had a limited tenure and clear objective to revive industry in a short term by incentivising consumption.

Scrappage policy as economic stimulus

At this stage, it is important to differentiate between a scrappage policy and a policy for retirement of vehicles or end-of-life of vehicles (ELVs). A scrappage policy that provided financial incentives for the purchase of fuel-efficient vehicles in exchange of dismantling of old vehicles is generally adopted as a one-time measure to help automobile manufacturers facing a steep plunge in demand. The US government’s 2009 programme, “cash for clunkers”, is one example. By contrast, an “end-of-life vehicle (ELV) is a comprehensive regulation that sets the rule for the dismantling and recycling of end-of-life vehicles.

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An end-of-life vehicle (ELV) is a vehicle that is no longer usable either due to natural aging, wear and tear or due to damage caused by accidents. The priority of ELV legislation is to prevent waste arising out of the disposal of the ELVs and to promote the prevention of waste, the ELV Directive places extended producer responsibility (EPR) as a policy approach under which manufacturers are given responsibility for the treatment or disposal of an ELVs. The EPR, inter alia, includes:

  1. Vehicle manufacturers to restrict the use of hazardous substances (especially lead, mercury, cadmium) in vehicles and to reduce them as far as possible to prevent their release into the environment, make recycling easier and avoid the need to dispose of hazardous waste.
  2. The design and production/assembly of new vehicles should be done in a manner that facilitates the dismantling, reuse, and recovery of components and materials.
  3. Vehicle manufacturers, in partnership with the suppliers of material and components, are pushed to increase the use of recycled material in vehicles to develop the markets for recycled materials.

Therefore, an ELV regulation sets its priority on environment conservation, circular economy, and sustainable development. With these targets, the regulation places the responsibility to achieve the stated objectives on four major stakeholders — the manufacturer, the last owner, the dismantling/recycling industry, and the regulating authority. The EU countries are among the first to propose legislation to tackle environmental problems created by the disposal of ELVs. Currently, most of the developed countries like the UK, Australia, and Japan have legislations to force vehicle manufacturers to recover and recycle their ELVs. In the US, no specific legislation exists at the federal level and each state has its legislation, and thus the target and procedures to achieve it varies.

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Global best practices in scrappage policy

India became the fourth largest auto market in 2019 with close to four million units sold in the passenger and commercial vehicles categories. With an increasing middle-class population and the consequent growing ownership of vehicles, India is poised to displace Japan as the third largest auto market by 2021. For various reasons, it is common for vehicle owners in India to continue using the vehicle well beyond its useful life. Driving such vehicles will result in higher emission, lower fuel efficiencies, and lower compliance with safety standards. If not properly dismantled and recycled, old vehicles pose a grave threat to the environment.

On the flip side, efficient ELV management has the potential to offer vast growth opportunities for the dismantling market in the coming years for recovery of raw material and for salvaging components in an environment-friendly manner. The vehicle recycling and resources recovery sector is unorganized in India and employs crude techniques for recovery of materials. A modern ELV recycling and waste management supported by a legislative ELV framework can ensure recovery at a rate higher than 90%. Lately, with the entry of major OEMs like Maruti Suzuki and Mahindra & Mahindra, the process of using advanced techniques has begun.

On the legislative front, the Delhi government has taken the lead by issuing “Guidelines for Scrapping of Motor Vehicles in Delhi, 2018” wherein vehicles registered in Delhi shall be scrapped only by an authorized scrapper. It informed the Supreme Court that by 2020, around 40 lakh vehicles out of 110 lakh plying in Delhi would be deregistered as they were either petrol vehicles more than 15 years old or diesel vehicles more than 10 years old. These statistics show the enormity of the problem of the safe disposal of ELVs in Delhi alone. This highlights the need for effective measures for ELV recycling/treatment.

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Apart from legislation, setting up modern dismantling and recovery infrastructure across the country is no less important to achieve the twin objectives of environmental protection and circular economy.

Economic benefits from recycling

ELV recycling keeps a bunch of dangerous toxins from being released into the soil, air, and water. It helps preserve scarce natural resources and energy by recycling metals and other elements. Dismantling and recovery have acquired the status of an important segment of the economy in many developed countries, contributing to employment creation. What is generally not acknowledged is the role of the recycling industry in making the process of car manufacturing more cost-effective by using recycled metals.

Using recovered metals from ELVs will result in energy saving in the range of 60-95%. There are other materials such as glass, plastic, tyres and oil, which can be recovered for reuse or recycling. There is a need for increasing awareness about the need for efficient recycling. In North America, close to 15 million vehicles reach the end of their use every year and 95% of them are sent for recycling. In the US, it is a $25 billion industry employing more than 140,000 people and providing the steel industry with more than 14 million tonne of steel annually.

Scrappage policy: The way forward

Like any other programme aimed at improving public health and safety, this also requires the support of political leadership. For the implementation of the ELVs system management would require the active participation of all stakeholders — the government, vehicle manufacturers, dealers, testing and certification agencies, insurance agencies, collection, dismantlers and recyclers, and end-users.

Enabling legal framework: The setting up of a modern dismantling unit would require an investment that can be justified only if there are volumes. The development of an enabling policy framework to provide guidance to stakeholders for proper handling of ELVs at each stage is the first requirement in India. There are ELV regulations being implemented by countries like Japan, the US, EU, UK, Germany and China. An appropriate legal framework suitable for the Indian market needs to be developed, incorporating the global best practices.

Vehicle fitness centres: The Motor Vehicles (Amendment) Act 2019 has provisions mandating the automated testing of vehicles for doing a fitness check. The government has already announced a proposal for setting up fully automated fitness test centres on a public-private partnership (PPP) basis for automatically testing the fitness of vehicles with enhanced accuracy testing and without human intervention. A fully automated fitness test centre eliminates chances of tampering with the test results with possible involvement of touts, while offering business opportunities for investors and entrepreneurs.

Infrastructure for dismantling ELVs: The existing setup for ELV management and recycling in India is considered highly inadequate to cope up with the growing volumes of automobiles and the consequent increase of ELV population. The dismantlers in India are mainly scrap dealers who recover and recycle other scrap products also. They work without modern equipment or tools. The primitive process employed by them not only reduces recovery efficiency, but also leads to contamination of the environment due to improper disposal of hazardous fluids and gases.

Environmentally sound vehicle dismantling infrastructure needs to be scaled up country-wide for safe disposal of waste and recovery and recycling of materials like steel, aluminium, and plastics. India currently has very few modern scrappage centres, not enough to cater to the market once the scrapping policy is implemented.

Designing vehicles with improved recyclability: In the longer-term, it should be the endeavour of the OEMs to design products to enable end-of-life recyclability, implying that designers need to think about recycling the product at the design stage itself. In nutshell, the design process should involve all stakeholders from the beginning as against the traditional design process.

Implementing the scrappage policy

The implementation may also be tedious and time-taking, given the fact that category-wise vehicle distribution in India is quite different from other top automobile manufacturing countries. Three-fourth of the vehicle population in India comprises 2- and 3-wheelers. Increasing awareness about ELV management and regulation among the users could be the priority as large sections of the vehicle owners are unaware of such requirements.

As regards infrastructure for ELV management, right from fitness testing centres to vehicle collection centres, and dismantling and recycling units, the entire chain needs to be designed to derive maximum economic benefits from the recovery and minimising environmental degradation. Apart from bringing all-inclusive legislation, the government would need to provide financial support to entrepreneurs for setting up infrastructure for ELV management on the lines offered for pollution-reducing equipment.

Besides global best practices, some useful studies have already taken place in the country in the development of “Guidelines for Environmentally Sound Management of end-of-life vehicles by the ministry of environment, forests, and climate change. Also, there are studies in automotive industry standards for ELVs by the Automotive Research Association of India (ARAI), Pune.

The Centre is already providing financial assistance to states for setting up modern automated fitness testing centres as these facilities are highly capital intensive. With the scrappage policy announcement by the government around the corner, there is an urgent need for an efficient scrap value chain, supported by a policy to ensure timely vehicle disposal either based on a cut-off year or fitness test result.

(Krishna Kumar Sinha is an industrial policy expert based in New Delhi. He retired from Indian Engineering Services in 2017. His last assignment with the government was as an Industrial adviser in the Department of Industrial Policy and Promotion, DIPP, currently known as DPIIT.)

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