India is today the world’s 3rd largest emitter of Carbon only after USA and China. While India’s carbon emissions are merely a 5th of China’s today, they are expected to fast catch up in the decades to come. India has always been committed to the cleaner global environment and always played a proactive role. At the Paris conference India not only presented itself as a responsible nation that would take steps towards safe guarding environment, but also positioned itself as a global leader that would pave the way to the future.
One of the major areas of environmental impact and carbon footprint is vehicular emissions. It is estimated that the number of vehicles of all types has increased threefold in the past thirty years. As part of its responsibility towards a cleaner and a sustainable environment, the Indian government is coming up with a policy for retiring diesel commercial vehicles that are 15 or more years old. The idea is to replace those older polluting commercial vehicles that we all see bellowing black smoke, with newer vehicles that pollute less.
Here is a snapshot of key commitments India made for a cleaner and sustainable environment:
- A 20-25% reduction by 2020 in emissions compared to 2005 levels.
- A 33-35% reduction by 2030 in emissions compared to 2005 levels.
- Generate 175 GW through renewable & other clean energy sources by 2022.
- Double the non-fossil fuel based energy share to 40% by 2030. Currently 80% of India’s energy is produced from fossil fuels, known to emit the most carbon of all energy generation methods.
- Significant expansion of forest cover to absorb an estimated 2.5 billion tonnes of CO2.
- Transitioning to Bharat Stage VI (BS VI) standards by April 2020 to reduce vehicular emissions by over 60% from the current BS III/IV across the country.
- Upgrade of fuel quality to the clean BS VI standard nationwide by April 2020.
- Encourage design & manufacture of Hybrid & Electric vehicles by providing necessary assistance and incentives to the market players under the FAME India scheme (Faster Adoption and Manufacturing of Hybrid & Electric vehicles) under NEMMP 2020 (National Electric Mobility Mission Plan).
- Provide impetus to production and consumption of Biofuels including Bio-diesel and Bio-ethanol under the National Biofuel Policy. The target is to achieve a 20% mixing of biofuel with the regular fuel.
- Increase Railway’s share in transportation from about 36% currently to 45% thereby achieving a cleaner land based transportation. Since majority of railway transportation is through electric engines, the overall consumption of diesel as fuel for transportation will be greatly reduced.
- Develop low carbon emitting transportation infrastructure that includes Dedicated Freight Corridors, Public Transport Systems & Energy Efficient Railways towards achieving a “Safe, Smart, Sustainable Green Transportation Network”.
- The top 5 global emitters – China, USA, India, Russia & Japan make up for 64% of global carbon emissions.
Although India is the world’s 3rd largest country in terms of carbon emissions, it can be seen that its per capita emission is nowhere in comparison to the other nations, all of which are heavily industrialized.
|Country||CO2 Emissions kt (2014)||CO2 Emissions (%)||Emission t per Capita (2014)|
**Source: EDGAR Database by European Commission & Netherlands Environmental Assessment Agency.
When questioned on retiring 15 year or older commercial vehicles in early December 2015, the Minister for Road Transport and Highways Mr. Nitin Gadkari is quoted to have said:
“An integrated policy to check pollution by over 10 year old commercial vehicle will be formed soon. Cabinet nod will be sought on it and only then it will come into force. There is no such decision at present to ban 15 years old commercial vehicles (CVs).”
The policy is termed – ‘Voluntary Vehicle Fleet Modernisation Programme’ and here is what it entails:
- Commercial heavy vehicles (trucks and buses) shall be covered under the programme.
- Vehicles that are 15 years or older would NOT be eligible to ply on the roads & will be scrapped.
- The implementation will be carried out in a phased manner.
- Vehicle owners would be compensated for the vehicle – valued at about 10% of its purchased price at the time of scrapping.
- Owners of scrapped vehicles will receive a rebate from the vehicle manufacturer when they purchase a new vehicle.
- Government of India shall also provide a concession against the scrapped vehicle at the time of purchasing the new vehicle.
We will of course have to wait for the full policy to be released to get full details and understanding of how the policy is going to be rolled out. The VVMP is going to have a definite impact on a multitude of aspects. Whilst much of the impact may be positive in the long run, as with any change programme there will be winners and there will be losers. Here we are looking at two major market segments that will be impacted – Transportation & Automobile sectors.
Transportation sector accounts for about 6.5% of India’s GDP and over 4% of India’s work force. Since 2000, the sector has grown at over 7% on average. According to the 12th five year plan report (2012-17) Road Transportation accounts for about 57% of all transport, while the USA accounts for 37% and China 22%. Railway Transport in India constitutes 36% while Inland Water transportation is the least utilized transportation service.
Most vehicle scrapping programmes globally had a ‘generally positive impact’ particularly for the automobile industry. Many major vehicle brands registered double digit growths throughout the duration of these programmes. With VVMP the Indian automobile industry also can be expected to gain considerably, with commercial heavy vehicle sales. However with the road transportation industry, the impact could be a mixed bag.
We are currently unsure as to how ‘Voluntary’ is the VVMP. The indication from the tonality of various announcements is, that this is going to be mandatory and not optional to fleet owners. The impact may vary greatly depending on how this policy if framed.
Goods & Bulk Transport
Whilst the transportation by its very nature means carrying goods to the length and breadth of the country, the impact may be more concentrated in the regions where there is high industrial activity. There are 8 major regions along with multiple smaller zones or ‘hotspots’ for industrial activity.
- Mumbai – Pune Industrial Region
- Gujarat Industrial Region
- Gurgaon – Delhi – Meerut Industrial Region
- Chotanagpur Industrial Region
- The Hugli Industrial Region
- Visakhapatnam – Guntur Industrial Region
- Bangalore – Tamil Nadu Industrial Region
- Kollam – Thiruvananthapuram Industrial Region
We must also mention the Online Retail Trade which has been growing exponentially in the country with the steeply increasing internet and mobile penetration. As of today most of these online retail stores cater predominantly to the metropolitan and urban space. With the recent push to digitization by government and increased broadband and mobile internet penetration, demand for online retail is only bound to grow. As more small towns and villages order online, the retail stores will have to create more and more local warehouses which in turn will require greater transport penetration.
The impact is going to be a mixed bag. Big logistics companies like VRL or Coastal Roadways with fleets running into 100s, keep overhauling vehicles as a policy and have efficient fleet maintenance processes. These organisations normally do not burden themselves with older vehicles. It is learnt that typically a vehicle is sold off once once it reaches a certain age – about 6-7 years. VVMP therefore is going to have a minimal impact on the very larger players.
VVMP may impact the smaller regional transportation players negatively if the programme makes scrapping mandatory. In this segment, fleet sizes are often less than 15. There are many private truckers who own and operate their own vehicle or very small local transportation shops with 2 or 3 trucks. These trucks are often very old – mostly over 15 years old. It is important to note that the vast majority if India, estimatedly over 75%, is made up of such small scale operators. Smaller players may lack financial means to procure new vehicles. The amount they are going to receive out of scrapping, would not nearly cover the new purchase.
|No. of Vehicles||Manufacturer Rebate||Net Cost (₹)||Manufacturer Rebate for Bulk Purchase (%)||Net Cost (₹)|
|1 – 5||5%||8.5 to 42.5 Lakhs|
|6 -10||5%||51 to 85 Lakhs||7%||49.8 to 83 Lakhs|
|11 – 20||5%||93.5 Lakhs to 1.7 Cr||8%||90 Lakhs to 1.65 Cr|
|21 – 50||5%||17.85 to 42.5 Cr||10%||16.8 to 40 Cr|
- Average Cost of Truck estimated at: ₹10,00,000.
- Compensation for scrapping @10%: ₹1,00,000.
- Average rebate by manufacturer on purchase of new vehicle estimated at 5%
- We assumed manufacturer may provide higher rebate as the number of vehicles purchased by an entity goes up & has been variedly estimated between 7% & 10%
Public & Private Transportation
It is estimated that private sector makes up for over 90% of road transportation of the Indian public. According to data published by the Indian government in April 2014, there are approximately 1,676,500 buses operating in India as of March 2012. Approximately 131,800 of these are owned and operated by state RTCs (Road Transportation Corporations).
Coming to Interconnecting or Non-Urban Transport, Bihar State RTC is the oldest fleet operating in the country with an average bus age of 11 years according to a 2014 report. Jammu & Kashmir RTC and Meghalaya RTC stand next at 9 and 8.7 years respectively. This would mean that by 2018-20, majority of these buses would be eligible for scrappage under the VVMP. Whilst private operator data in this direction is not available, we can safely assume that the situation can be at least similar to the state RTCs or worse. Private buses operated in Madhya Pradesh, Bihar, Haryana, Uttar Pradesh, Rajasthan and so on, are generally by small business operators with aging fleets varying in sizes between 1 & 20. The state run RTCs however have the advantage of public sector funding and are themselves experienced organisations with vehicle overhauling experience, well organised workshops and depots. Whilst we expect some financial impact in this segment, the operational impact may be minimal.
According to experts the cost of transportation through waterways is a half of the cost through railways and a third of the cost through road transport. There is particular interest in Inland Waterways & Coastal Shipping with the government making it one of the areas of strong focus. The 12th Five Year Plan report says the following concerning transportation through Inland Waterways:
“According to recent studies, the total external costs of inland navigation after accounting for all externalities, including accidents, congestion, noise emissions, air pollution and other environmental impacts are seven times lower than that of road transport.”
The share of waterways based transport is less than 1% in India compared to 21% in USA, 12% in Europe and 10% in China. While our waterways today are quite under utilized, the government has exhibited renewed interest in developing this area.
As per The National Waterways Act (2016), a total of 111 waterways have been designated and identified for inland waterways transportation. Whist the first 6 (NW 1 thru 6) have been designated variously between 1986 and 2008, the remaining 105 have been designated and identified in 2016 alone.
|NW1||Ganga, Bhagirathi, Hoogly||1620||Operational & expanded since 1986.|
|NW2||Brahmaputra||891||Operational since 1988|
|NW3||Udagamandal, Champakara, West Coast canals||205||Operational since 1993|
|NW4||Godavari river & canals||1095||Under Development|
|NW5||Brahmani, Mahanadi delta & East Coast Canal||623||Expected to be fully operational by 2016. Open since 2008|
|NW6||Barak River||121||To be fully operational by 2019.|
In addition the government is also developing new terminals on the existing waterways. Should this endeavour be successful, a new avenue of transportation and market segment will be up for grabs.
What to Expect
- Vehicle Dumping: If the VVMP roll out is done in phases, operators from one region may look to sell of their aging vehicle to a region where the programme is not in effect.
- The banking sector may see much increased demand from various transportation businesses for loans towards procurement of new vehicles.
- It is possible that the commodity prices may go up on this account. Greater investment in purchasing vehicles on part of the operator would mean a greater burden on the end consumer.
The automobile industry accounts for 7% of India’s GDP employing over 19 million people. Various estimates peg the number of diesel commercial heavy vehicles aged over 15 years to be anywhere between 2.5 to 3.5 million as of March 2015. This would mean a tremendous growth opportunity for the players in the heavy vehicle manufacturing sector, as a result of VVMP. According to various figures the M&HCV (Medium & Heavy Commercial Vehicle) industry grew by a staggering 30% in 2015-16 at 302,273 units.
**Heavy Commercial Vehicle sales data deduced from various company annual reports and market reports.
The number of commercial vehicles on the road has been increasing steadily over the past 10 years. While a relative reduction in production and sales volumes was observed post the economic slowdown, the market is again showing an upward trend.
As the demand grows in the Automobile sector particularly the manufacturing sector, the demand is bound to increase with the related industries along the supply chain. Major sectors include:
- Tyre Manufacturers
- Iron & Steel
Tyre manufacturers can be one of the biggest gainers of the V-VMP move. While the demand is increasing as natural progression owing to increasing number of vehicles on the road, the V-VMP would mean a spike in the demand for the automobile sector which would in turn create a demand spike in demand for MHCV tyres. Greater demand for tyres would also mean that the rubber industry along the supply chain is also set to witness an increased demand.
The automobile industry is estimated to consume over 10% of the iron & steel produced. The Iron & Steel industry is expected to be one of the major gainers of the VVMP.
While growth rates in the steel industry over time have been sporadic owing to various factors, this move will create a definite market particularly for automobile grade steel. The recent government steps to curb procurement of the cheaper steel from foreign players like China has created the right kind of environment for the Indian steel industry and this move is only expected to provide further fillip to the industry. Scrapping of older vehicles is another area the industry will gain from. Recycling of metal from scrapped vehicles would prove quite cost effective as opposed to using mined mineral in the ore extraction and smelting processes. This would mean reduced costs for production of steel thereby increasing profitability.
- The share of steel in the kerb weight of a truck is more than 50% – greater the demand for trucks, greater the demand for automobile grade steel.
- Currently the production of crude steel is growing at 7.5% while the finished/refined steel is growing at about 3.2%.
- The domestic consumption of steel registered a growth of mere 3.1%.
The VVMP roll out therefore would set a considerable demand for steel and in short time.
Vehicle Refurbishment & Recycling
This is one area which the Indian automobile industry has not explored owing to the absence of an organised scrapping industry in the country. The vehicle scrapping sector of India is largely disorganized and operates in silos under small traders in various urban centres of the country. The scrapped material thereof is usually unmaintained and unusable for any quality production.
Vehicle recycling and refurbishment is quite a prevalent and mature industry in advanced economies like the United States and Japan. The vehicles that do not meet the requisite standards in those countries are often taken down, refurbished and sold off to smaller economies. Major markets include Latin American and African nations. South Africa is considered a big market for used or refurbished vehicles.
With increased global emphasis on cleaner fuels and less polluting vehicles, the automobile sector of India will need to adopt newer technologies. It is expected that a $10 billion investment would have to be put into the automobile (car) sector to produce vehicles that are BS VI compliant. The consumer is also going to find it costlier to own a car with the price of an average diesel powered car being ₹75,000 to 100,000 dearer.
Whilst long haul and heavy duty vehicles still might have to rely on diesel for some time to come, there is endeavour to avoid diesel and look at other alternatives when it comes to MHCVs like city buses.
- CNG: Vehicles, buses that run on Compressed Natural Gas. Today they are also trains that are powered by CNG. While CNG engines have been in the market for over two decades at various levels now, their penetration in India is still minimal. This is owing to greater vehicle costs and lesser availability of CNG across the length and breadth of the country. Also the particular vehicles running on CNG in India like city buses do not generate adequate power to run the vehicle and also provide air-conditioning. This has been a constraint and has driven many urban transport operators towards diesel powered vehicles.
- Hybrid: The bus typically operates on two fuels, diesel & CNG. A Hybrid fuel tank is provided and the driver can switch between the fuel types depending on the necessity.
- Electric: These are battery operated buses. Whilst these have been available in the global market for a while, not many operators in India have considered this option. Owing to various technical reasons and also owing to the energy situation in the country.
- Ethanol: Swedish maker Scania has introduced an environment friendly bus that runs on ethanol. However the bus is about twice as costly as a normal bus and also the mileage offered by ethanol fuelled bus is only half that of diesel.
- LNG: Liquified Natural Gas operated bus was recently designed and developed by Tata Motors and introduced in November 2016. The bus delivers a strong power of 130 HP and is reported to run 600 KM approximately on a full tank of LNG fuel. This however is in an introductory trial stage. This will take time as infrastructure necessary for LNG penetration into various urban centres will also need to be created.
- Bio-CNG: Vehicle was demonstrated by Mahindra & Mahindra in January 2016. The bio-CNG plant developed by the company was stated as a ‘technology demonstration’.
It must be noted that in all the above cases, fuel supply penetration for any alternative fuel is an essential prerequisite for a smooth transition away from diesel vehicles.
What to Expect
- The MHCV segment of the automobile industry is set to witness a surge in demand once the V-VMP is rolled out. We expect the overall demand to go up by as much as 30% in the first 2 years considering the number of vehicles off-roaded should the rollout be mandatory.
- Associated sectors along the supply chain such as the Iron & Steel industry, tyre manufacturing sector, OEM segment and so on are also expected to witness a short term spike in demand as a result.
- New opportunities are expected to be created owing the government decision to set up organised vehicle breaking/scrapping centres to handle the scrapped vehicles locally.
- Vehicle recycling for refurbished parts, sales of refurbished vehicles to other developing economies may be avenues of new and unexplored opportunity.
- Greater investment in alternative fuels and technologies can be expected from the automobile manufactures in the medium to long run.
- Demand for vehicles powered by cleaner fuels such as CNG may shoot up in smaller towns more than metros.
Below is a SWOT analysis based on the understanding we have obtained in this process.
The V-VMP when rolled out is expected to create largely positive results in almost every aspect. As a responsible nation it is the responsibility of one generation to entrust a safer, better and a cleaner world to the next. No cost can be measured when it comes to a clean and sustainable environment. In addition the move is also expected to be generally and substantially positive on the economy in terms of creating greater demand for consumption, new avenues to explore, bring newer technologies and practices. The only concern happens to be the small time transporter. So long as adequate steps are taken to address the one issue, this move can be a transformative one for the coming generations.