India's circular economy dream: Modi govt is pushing the scrapping policy with sweeteners for automakers

The government felt compelled to introduce the policy because even as it has incrementally tightened fuel emission norms—from the Bharat Stage Emission Standards (BSES) introduced in 2000 all the way to BS-VI in 2020 and the stricter BS-VII that is expected next year—cars that adhered to older emission standards and that may not be live up to newer norms continue to ply on India’s roads.

Nitin Gadkari, Union Minister of Road Transport and Highways, has said the transport sector accounts for 40% of India’s total emissions. If unchecked, this could hinder India’s ambitious goal of ensuring net-zero emissions by 2070.

Of course, if successful, the policy may well boost car sales since old cars will need to be replaced after the stipulated time. In the process, it could increase the automobile industry’s contribution to GDP, currently pegged at 7%. This push also comes at a very difficult time for the industry with dealers sitting on high inventory levels. In fact, automobile manufacturers anticipate a slump in demand in FY25. According to a report by rating agency CareEdge Ratings, the domestic passenger vehicles industry will grow at 3-5% in FY25, a significant decline from 7.4% in FY24, because of a high base, a shrinking order book, and expectations of subdued demand for entry-level variants. In the scrapping policy, the government and the industry believe they have found the means to reverse that trend.

There is, however, a lot more that needs to be done before the scrapping policy can deliver. Though it has been in force for three years now, it has failed to reach the scale the government envisaged, partly because of the dearth of scrapyards and testing centres.

Out with the Old

According to the Ministry of Road Transport and Highways (MoRTH), more than 4.5 million old medium and heavy commercial vehicles—including buses and trucks—as well as more than 7.5 million old taxis and cars are currently plying on India’s roads. Old vehicles have been identified as diesel vehicles that are more than 10 years old and petrol vehicles that are 15 years old. Personal vehicles older than 20 years and commercial vehicles older than 15 years are required to be phased out if deemed unfit as well.

The eligibility to phase out old vehicles depends on an inspection at an automated testing station (ATS) or fitness centre. If the vehicle is deemed fit after the inspection, the owners will receive a health certificate for another five years. Otherwise, it must make its way to the scrapyard.

Under the policy—launched with an investment of Rs 10,000 crore and with the aim to create 35,000 jobs—owners are to be paid around 5% of the vehicle’s ex-showroom price for scrapping old vehicles. Additionally, customers could receive registration fee waivers and road tax concessions. State governments, too, have been asked to pitch in with concessions on motor vehicle tax of up to 25% for non-transport vehicles and 15% for transport vehicles. Additionally, customers could receive discounts from carmakers if they produce a certificate of deposit testifying that they have scrapped an old car.

Despite good intentions, industry leaders observe, the policy has had little impact. There have been several rounds of discussions between state governments, the Union government, and automakers over the past three years, but with little to show for it.

That is one reason why Vinod Aggarwal, immediate past president of the Society of Indian Automobile Manufacturers (SIAM) and MD & CEO of Volvo Eicher Commercial Vehicles (VECV), called on the government to provide more incentives in the Union Budget, presented on July 23. “We are expecting that government to do something more on the incentives for scrapping of vehicles, because there is a policy that is already in place, but, of course, we have not seen much impact as of now,” Aggarwal had said. Those hopes were dashed.

But just a month later, Union Minister Gadkari, a big votary of the policy, intervened at a meeting with commercial and passenger vehicle manufacturers who are part of SIAM, on August 27. After the meeting, SIAM signed a memorandum of understanding with the MoRTH, where it agreed to offer discounts of 1.5–3% to customers who purchase new vehicles after scrapping old ones.

“This initiative will significantly advance our Circular Economy efforts [sic], ensuring that cleaner, safer, and more efficient vehicles are on our roads,” Gadkari said in a post on the social media platform X.

In September, Gadkari upped the ante. Speaking at the 64th SIAM convention, he said discounts could rise above 3%, observing that the scrapping policy will be a good tool to increase competition amongst automobile manufacturers. “They might like it or not like it, but automakers will have to increase the discount amidst rising competition. If they are offering product discounts at a good and reasonable rate, their turnover will be good,” said Gadkari.

Tepid Response

Despite those exhortations from the minister and their own warm welcome to the policy, automakers have remained tight-lipped about offering more discounts. “Companies have given discounts individually, and it is market forces that determine how much discount is given,” says Aggarwal of VECV.

According to Nalinikanth Gollagunta, CEO of the Automotive Division at Mahindra & Mahindra, the company has offered discounts in line with the industry at 1.5%. “As the market evolves and as the customer responds, we will be very open to offering more discounts,” he adds.

The policy must be embraced because it aims to tackle such problems as pollution, road traffic, and congestion and aims to improve fuel efficiency, says Rajeev Chaba, CEO Emeritus of JSW MG Motor India. “That’s why there should be huge incentives from all stakeholders, including OEMs (original equipment manufacturers). We have agreed to 3%, and I am sure when people start seeing success, these discounts will be higher,” he says.

The government, too, is studying if it should tweak the rules such that they are linked to carbon emissions instead of the age of vehicles, Anurag Jain, Secretary, MoRTH, said during the SIAM event in September. “People tell us that if they’ve maintained their vehicle well, why should they be mandated to scrap it? We are studying whether we can enforce a scrapping mandate where the upper limit is relative to the pollution of the vehicle… instead of the 15-year mandate,” Jain said.

Road Filled With Challenges

Drawing on the experiences of the European and US automobile markets, at the SIAM conference in September, Gadkari said both were able to increase domestic automobile sales by 9–10%. But there is a big, gaping hole in operationalising the policy. “India has [30 million] end-of-life vehicles. The fitness centres are a problem,” Gadkari said. He called on automakers to set up fitness and scrapping centres.

“In the current scrapping infrastructure, there are only 63 operational scrapping centres; 60 are under construction, and 14 are in the pipeline. There are just 78 operational [fitness centres], 179 are under construction, and 83 are in the pipeline,” said Gadkari. The government has pegged the requirement at 1,000 scrapping centres, and there are over 100 scrapping centres per the road transport ministry.

Companies appear to have heeded the call to bridge that gap. Tata Motors, the country’s largest commercial vehicles manufacturer, has five registered vehicle scrapping centres under its REWIRE strategy. The company plans to roll out more in the next few months. Ashok Leyland is also preparing to launch its first facility under a franchise model in Tamil Nadu. The company plans to open three to four more in the next 12 months, Shenu Agarwal, MD & CEO, Ashok Leyland, told reporters on the sidelines of the SIAM event.

The industry is aware of the knock-on benefits. “When all the old vehicles are scrapped, materials such as steel, rubber, plastic, and aluminium, among others, can be circulated back. They will have an advantage for the environment and will have low cost, which will benefit the industry,” concurs Aggarwal of VECV.

One segment that could face some trouble is that of two-wheelers. Puneet Gupta, Director for India & Asean Automotive Market at rating firm S&P Global, says: “This is a very price-sensitive segment.” Many of those using older two-wheelers tend to be from lower-income backgrounds. “I don’t believe the programme will be very effective because, for those with bikes that are 10 or 15 years old, the main issue is that they often lack the financial means to purchase new vehicles. Given the high cost of newer models, this policy might not provide much assistance to them,” he adds.

Gupta, however, sees scrapping picking up pace in the passenger and commercial vehicle segments.

The industry and the government will be hoping that that comes true. In the meantime, there is work to be done in terms of scaling up the infrastructure.

@OrielAstha11, @BhutaniChetan