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Auto Scrappage Policy and Green Tax a Double Booster for Auto Stocks in India – Research & Ranking

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It is said that “old is gold”. But it is not true for older vehicles, especially commercial ones that are more than ten years old and pollute a lot.

Rising air pollution is a significant cause for concern affecting both health and the environment. Older vehicles are one of the most significant contributors to air pollution. Air pollutants emitted by vehicles can cause asthma, heart disease, congenital disabilities and even some types of cancers.

In the Union Budget speech for 2021-22, Finance Minister Nirmala Sitharaman has announced the much-awaited vehicle scrapping policy.

“We will be separately announcing a voluntary vehicle scrapping policy to phase out old and unfit vehicles. This will help encourage fuel-efficient and environment-friendly vehicles, thereby reducing vehicular pollution and oil import bills” stated Nirmala Sitharaman.

Under the proposed voluntary vehicle scrapping policy, personal vehicles would undergo fitness tests in automated fitness centres after 20 years. In contrast, it will be after 15 years in the case of commercial vehicles.

Many developed countries have scrappage policies to ensure old polluting vehicles are replaced with less polluting vehicles. For example, in 2009, America had introduced a Car Allowance Rebate System popularly known as the \’Cash for Clunkers\’ under which car owners would be eligible to receive around $4,500 for their old vehicles if they buy a more fuel-efficient vehicle as a replacement. According to popular estimates, around 700,000 vehicles were scrapped in America under this program.

Many other countries like Canada, China, USA, UK, Singapore, Germany, etc. who have rolled out scrappage programs for old vehicles have achieved good results. Apart from stimulating their auto industry, there has been a significant reduction in vehicular emissions resulting in better air quality.

Besides the air pollution caused by old vehicles, there is another strong reason why vehicle scrappage policy was just the need of the hour. The current vehicle scrapping structure in India is highly unorganized and dangerous for both humans and the environment.

Whether it is the scrapyard at Pangarh in Kolkata or the one at CST Road, Kurla in Mumbai, workers across vehicle scrapyards in India can be seen dismantling cars with zero safety gears using hammers and gas cutters. There is no proper disposal mechanism for liquids like engine oil, brake oil or coolant and are often dumped on the ground leading to high groundwater pollution.

Auto parts from scrapped vehicles that can be reused are resold while other parts are disposed of carelessly and release harmful pollutants such as asbestos and mercury.

As per a detailed study by the Central Pollution Control Board, there would be an estimated 22 million obsolete vehicles in India by 2025, requiring recycling. The study also pointed out that around 25% of the waste material generated from these obsolete vehicles would pose a potential environmental threat, due to heavy metals, ozone-depleting substances, and waste oils lubricants and other liquids etc.

Due to the absence of adequate incentive to scrap obsolete vehicles in India earlier, many car owners would simply dump their car on roadsides or open spaces leading to traffic congestion.

Last week, Nitin Gadkari, the Union Minister for Road, Transport and Highways, approved the scrappage policy of Government department and PSU vehicles that are older than 15-years.

The ministry had also recently approved a proposal for levy of a ‘Green tax’ on older vehicles recently. As per the proposal, the ‘Green tax’ would be charged for commercial vehicles older than eight years during the time of renewal of fitness certificate at the rate of 10 to 25% of the road tax. On the other hand, personal vehicles are to be charged green tax when renewing registration certification after 15 years. Public transport vehicles like city buses will be charged lower rate, while a higher tax will be imposed for vehicles registered in highly polluted cities.

Under this policy, vigorous hybrids, electric vehicles and those running on alternate fuels like CNG, ethanol and LPG will be exempted. Both these moves are expected to boost auto stocks in India which was adversely impacted by the pandemic last year.

Auto stocks in India which will benefit the most from auto scrappage policy and green tax

Maruti Suzuki India is likely to emerge as one of the biggest beneficiaries of the proposed green tax on vehicles. The auto giant has the most extensive portfolio of CNG vehicles compared to all other auto manufacturers in India. With diesel and petrol prices at record highs and the ‘Green tax’ on vehicles running on these fuels, a significant chunk of car buyers may opt for CNG vehicles. As per media reports, the company\’s first electric vehicle, the Wagon R EV is currently in advanced stage of development and may be launched within the next few months.

According to data of countries which had announced similar scrappage policies in the past, it has been observed that it was manufacturers of compact and fuel-efficient cars which had benefited the most, while manufacturers of luxury cars had little benefit from the program.

Tata Motors is also expected to gain from this new policy as its Nexon EV is one of the best-selling cars in India’s EV segment.

Overall, the proposed new scrappage policy for vehicles and the ‘Green tax’ will provide a much-needed impetus to auto stocks in India and the entire eco-system of auto ancillaries and auto component manufacturers in India. At the same time, it also offers an incentive to owners of old vehicles to upgrade to newer and better vehicles, a win-win situation for all.

Read more:  How Long-term investing helps create life-changing wealth – TOI

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