Apex Court Ruling on Overloading - A Win-Win Situation For All

Sachin Mathur, Head-Automotive Sector Research Group, CRISIL Research

In a significant judgement for the road freight industry, the Supreme Court passed an order banning the practice followed by some state governments, of issuing gold cards/tokens that allow the holders to overload their trucks after payment of fixed charges. In a judgement delivered on November 9, 2005, the court ordered state governments to offload the overloaded cargo and charge the transporter the cost of the operations. In addition, the state governments were ordered to levy a penalty on the extra tonnage.

This judgement will affect nine states, which have been permitting the issue of golden passes. However, other states had issued private passes through RTOs, allowing these overloaded trucks to go through their territory; hence, overloaded trucks had continued to harm national and state highways all over the country.

India is currently in the throes of a road revolution. Under the National Highway Development Programme (NHDP), investments of over Rs. 1,70,000 crore are expected to be pumped into the country's highway network in the next 5-7 years. These highways are designed to last for at least 10-12 years. However, even a 10 per cent overloading of goods carriage in excess of prescribed weight can reduce the life of roads and highways by 35 per cent. In terms of road density (paved roads length in km per sq km) India stands at 0.66, which is comparable to developed countries like USA, which has a road density of 0.65. However, India lags behind in terms of the quality of surface and width of roads. Poor road surfaces result in low speed of vehicles, high wear and tear of vehicles and hence higher user cost. Indian roads are designed to support an axle load of 8.16 tonnes, but overloading of trucks to the extent of 100-150 per cent has eroded the quality of the already poorly surfaced roads drastically.

To analyse the current situation, CRISIL Research, the research division of CRISIL Ltd, interacted with a host of industry sources, including vehicle financing companies, transporters, dealers of commercial vehicles, automobile associations, freight-intensive product manufacturing companies (those that use roads extensively for transport), original equipment manufacturers, government agencies and implementing agencies like RTOs. Across the segments, there was unanimous concern over the extent of implementation, and there was also a common view that adherence to the Supreme Court order is a must. We feel the implementation of the ruling would be a win-win situation across segments in the long run.

Since the judgement was issued, freight rates have seen an across-the-board hike. The potential for a further increase in freight rates is a cause of worry for all freight-intensive industries. However, we expect this to be a short-term phenomenon and freight rates to come down from their current high levels within the year with better stock utilisation and addition of new vehicle stock. The implementation of the SC ruling will not only improve highway durability, it will benefit transporters by reducing wear and tear on their vehicles, and the commercial vehicles industry by enhancing their sales.

 
Immediate impact of the Supreme Court ruling

▪	Freight rates have gone up substantially in the last 2 months: Although, freight rates are expected to rise by 25-30 per cent year-on-year in the short-term, it is a general belief that this unexpected increase was caused by the uncertainty among transporters over the extent of implementation of the Supreme Court order.
▪	Annual contracts have increased pressure on spot freight rates: Many of the annual contracts currently under operation were entered into by transporters at competitive rates that took overloading into consideration. The clampdown on overloading has led to huge losses for such transporters. The sudden upsurge in freight rates is also attributed to transporters trying to make up for these losses by hiking spot freight rates. CRISIL Research expects that transporters who have entered into long-term contracts would buy additional trucks immediately to cope with their fleet shortage and fulfill their existing commitments.
▪	Better capacity utilisation of existing stock: In the short run, the same number of trucks would carry smaller loads than before, but we expect the capacity utilisation to rise, with trucks taking more trips between routes.

 
Impact on commercial vehicle demand

One industry that will see a direct and immediate benefit from the Supreme Court ruling is the commercial vehicles segment. While part of the impact of the ruling will be absorbed by better utilisation of the existing fleet and a partial shift of specific commodities to rail, the remaining additional freight requirement would translate into a one-time additional demand of commercial vehicles. Assuming 50 per cent overloading and 50 per cent implementation of the court order across India, we estimate this demand to translate into 15,000-28,000 additional units, mostly in higher tonnage vehicles like trailers and multi-axle vehicles.

 
The extent of implementation: A key monitorable

While the benefits of the SC ruling seem to be manifold, there are practical hurdles in its implementation. So far, the extent of implementation of the order has varied across states. While the western and central states have fared well, eastern states are going slow, and southern states, after a good beginning, have started losing their grip. Although, the order specifically directed offloading of additional cargo, we understand from industry sources that offloading is difficult in practice and cases of actual offloading have been rare. This weakness is compensated for to an extent by the heaviness of the penalty; for instance, in Maharashtra, the penalty is Rs. 5,000-7,000 per overloaded tonne. Implementation has been quicker and more successful in Gujarat because of its electronic weighbridge system. Several other states lack this infrastructure, and hence have preferred to levy high penalties to discourage overloading.

All said and done, the long-term benefits of ending a system of government-approved overloading will only materialise if the SC order is implemented strictly. For the freight industry and all industries dependent on the roads for their freight needs, this will be the key monitorable to watch in the coming months.

Note: For information on CRISIL Research's Automotive Sector research initiatives, contact Anuradha Srinivasan at 022-55588030 or e-mail at asrinivasan@crisil.com.