INDIA MOVES TO BS-IV EMISSION NORMS; SETS THE STAGE FOR THE AMBITIOUS BS-VI 2020 ROLLOUT

Come April 01, 2017 India will undergo a fundamental change as the country is ready to adopt the BS IV emission norms that will be applicable nationwide. Passenger vehicles have been compliant with BS IV norms for a while, but now the two wheelers as well as critical Commercial and M&HV will also join the fleet, resulting in conforming to the norms across all states and all motor vehicles.

Set up by the Central Government 17 years ago, Bharat Stage emission standards popularly called BS norms are emission standards that were introduced in the year 2000 to regulate the output of air pollutants from internal combustion engine equipment, including all motor vehicles. The Bharat Stage norms are based on the European emission regulations and hold equal standards in comparison to the same. Bharat Stage IV emission standards were put in place in 13 major cities in April 2010. Now BS-IV norms are stipulated to come into effect nationwide from April 01, 2017 bringing all motor vehicles under its purview mainly the M&HCV sector that still majorly are on BS III.

BS-IV – Need of The Hour

India has held on to the fastest growing economy tag in the world for a while now, which was followed by a major jump in construction activities, setting up and expansion of various industries and huge spike in the number of automobiles that ply in the country when compared to the scenario 15 years ago. This growth and development has come at a cost of increased pollution levels in many parts of the country led by the National Capital Region. The BS IV compliant engines emit relatively lower levels of carbon monoxide, Hydrocarbons and Nitrogen Oxide as prolonged exposure to which can lead to respiratory and other health risks such as such as cancer, strokes and heart disease.

It has been 12 years since India switched to BS III norms in 2005 from BS II that was introduced in 2001 and thus a shift to BS IV seems legit, timely and step in the right direction. This coming at a time when the pollution level in some parts of the country has reached alarming levels is a step in the right direction and is also a testimony to the commitment India made at the Paris Climate Change treaty last year in October, to bring down its overall carbon dioxide emission levels in order to keep global average temperatures from rising above 1.5°C as compared to the pre-industrial years. India contributes 6% of the global CO2 emissions following China, which accounts for 28%, the United States for 16% and the European Union 10%.

Are Industry players ready For BS-VI?

India, under Prime Minister Modi led government is taking a bold step in skipping BS-V to implement BS-VI four years ahead the deadline. If India is able to adopt this by the time frame set for it successfully, it will be the first country to skip the BS V stage and also the first to switch to BS VI in such a short span of time. However major players have already registered their concerns regarding the same. There are two major industries that are going to be impacted by this government policy. The first and obvious is the Automobile and Auto ancillary sector while the second and lesser known space would be the Oil Refinery sector of the country. BS IV compliant engines need to be supported with a higher grade of fuel, the burden of providing which falls on the oil refineries. The cleaner fuels like the BS-IV grade have low sulphur level that requires different treatment when compared to the current process. This will definitely inflate the capex funding by the refineries.

While BS-IV fuel contains 50 parts per million (ppm) sulphur, BS-V and BS-VI grade fuel have 10 ppm sulphur. Under BS-III norms, petrol and diesel have sulphur content of 150 ppm and 350 ppm, respectively. Oil refineries had upgraded technology and invested over Rs.55,000 crore for production and supply of BS-III and BS-IV fuels. Another Rs.40, 000 crore investment would be required for further upgrade as per market experts.  The decision to leapfrog from Bharat Stage IV to Bharat stage VI in a timeframe of three years has managed to disrupt the two major industries which could result in a mammoth drain of resources in the next 2-3 years.

What It Means To OEMs - Starting from the Oil Refineries, a capex of around 40,000cr is an extremely large amount and the returns from the same would start trickling in after roll out of the BS VI fuel in April 2020. As per Sanjiv Singh, director (refineries), IOC, the switch from BS IV to BS VI will entail up gradation expenditure of Rs 13,000 crore, and another Rs 7,000 crore to make all refineries BS VI compliant for IOC alone. BS IV has had a longer time frame to be put into full fledged implementation but the same does not hold true for BS VI. Currently BS III and BS IV fuels are transported through underground pipelines and road transport however the shift to BS VI would require the companies to flush out the BS IV variant before BS VI can be dispatched months ahead of the deadline in order to avoid contamination. For IOC, this involves refueling 25,000 fuel stations, including some in remote locations. Others like HPCL and BPCL, it goes up to 50,000-plus petrol pumps across the country. Therefore a large amount would have to be transported through road initially including quantities required by the auto industry, making it an enormous exercise for the logistics sector. The coming switch and distribution to BS IV would be a dress rehearsal for BS VI and provide the necessary faith in the OMC with regard to executing of such a herculean task. 

Why Are Automakers Concerned - Coming To Automakers, they need to test the BS-VI compliant vehicles for at least a year which again puts burden on the refineries to supply sufficient BS-VI fuel by 2019 and not 2020.BS VI fuel which is similar to the Euro 6 fuel cannot be blindly mirrored as the driving conditions, speed and weather of India varies from that of Europe. Thus, the auto makers need to adapt and program the vehicles to the stipulated standards but to suit the requirements as per Indian conditions, if not the repercussions could be massive to correct the same after. One of the biggest concerns that manufacturers who were until now relying or considering the idea of using localized parts will have to drop the plan and therefore cost will be higher which will reflect in the price tags of the vehicles.

Supreme Court Verdict On BS-III Inventory Awaited

The next hurdle is that the Auto manufacturers have put in place a plea seeking permission to sell BS III compliant vehicles post April 01, 2017 deadline in order to prevent inventory loss. A petition has also been filed by the Federation of Automobile Dealers Association (Fada) against the ban on sale of BS-III vehicles which could potentially impact nearly 20,000 dealers financially and 9 lakh vehicles resulting in loss of employment too. The Supreme Court is expected to announce the verdict on 27^th March after examining the figures which will have a significant impact on the relevant companies and the government which has spent close to 18,000 crore to shift to BS-IV fuel. The court is mulling on whether to reimburse this amount to the government if sale of BS III vehicles is allowed post March 31. According to the Society of Indian Automobile Manufacturers (SIAM), it has submitted data to the Apex court that states that companies were holding a stock of 8,24,275 such vehicles which included 96,724 commercial vehicles, 6,71,308 two wheelers, 40,048 three wheelers and 16,198 cars on a monthly basis from January 2016.

An extension if granted to auto companies would not go well with companies like Bajaj Auto who have successfully switched to BS-IV standards three months before the deadline and have also recommended that the government penalizes company that have not done the same and banning the sale of BS III variants. As the technology incorporated in BS IV vehicles is advanced, the cost of vehicles is expected to rise by Rs.20,000 to 2 lakh which could prompt the retailers to prepone their purchases leading to a possible spike in the quarter four sales of the auto companies. This in-turn would result in lower sales in the subsequent quarters; however demand would eventually pick up as all vehicles would be BS IV compliant by then.

Positive In the Long Run

Since BS-V and BS-VI are based on similar technology, the whole exercise of flushing the previous variant for the newer one will not have to be repeated twice. This will save the cost for the oil refineries who do not need to set their capex plans twice. According to the Center of Science and Environment, implementation of BS-VI will reduce the level of Nitogen Oxide emissions from diesel cars by approx 68% and upto 25% for Petrol Cars. It is a welcome move because India is already 10 years behind Europe when it comes to reducing the adverse effect of motorization on Public as per Center of Science and Environment.

It is going to be a race against time, as both the Auto players as well as Oil Refineries have been preparing for BS IV of since 2010. However, the same time luxury is not present this time around and the surprise skip of BS-V makes the process involved to be executed in a fast, precise and efficient manner than before. This is a herculean task that needs to be accomplished, which poses several challenges that need to be tackled ahead of the April 01, 2020 deadline.

The scrappage policy that has been introduced by the Central government would play the role of a catalyst to help achieve the objective of making all vehicles BS VI complaint by 2020. According to a CRISIL research report, the auto industry could witness a potential boost of (CV) sales volume by a cumulative 65% (over sales in fiscal 2016) between fiscals 2018 and 2020.* Thus the Auto industry is set up for a revamp and the coming five years would see large changes, opportunities and growth in the sector making it a lucrative space to be invested in.

* CRISIL Press Release dated February 22, 2017