Vehicle Scrappage Policy: How Modi Government Has A Great Opportunity To Help Economy And Environment, And Create Jobs

Public policies that work like a rambaan — solve many problems in a single shot — are very rare. The voluntary ‘vehicle scrappage policy’ announced by Union Finance Minister Nirmala Sitharaman in the 2020-21 general budget has the potential to serve as one such government programme.

"Those going for scrapping of their vehicles will get some benefits from the manufacturers. In fact, scrapping policy will prove to be a boon... not only it will boost economy, benefit automobile sector but also check vehicular pollution," Union Minister for Transport, Highways and Shipping Nitin Gadkari told PTI recently.

The much-needed and much-awaited scrap policy for old vehicles has been in the works for sometime now and Gadkari in the past has often spoken about the importance of putting in place such an initiative.

The importance of the automobile industry for the Indian economy cannot be overstated. It forms the backbone of the country’s manufacturing sector, comprising 40 per cent of the sector’s share of the gross domestic product (GDP).

Of this, about half is contributed by the car industry. And given the fact that this sector has absorbed some major shocks in the last four years like the introduction of goods and services tax, forced transition to BS-VI fuel norms directly from the BS-IV standard, demonetisation and Covid-19 pandemic, it can use some stimulus.

So, a policy which can give fillip to the automotive sales is something that needs to be celebrated on that metric alone. Moreover, the potential impact of a good scrappage policy on the environment is not just a cherry on top, it’s much more than that given the positive effects that will accrue on health of the people in the long run from reduced pollution of vehicles.

The government seems quite hopeful of the success of the scheme. It expects over one crore old vehicles (more than 15 years old) to go to scrap, increase turnover of automobile industry from 4.5 lakh crore at present to Rs 10 lakh crore in a few years and kick start new investments of approximately Rs 10,000 crore which will help create around 50,000 jobs.

But is the proposed scrappage policy that good? While the full policy will be out any day now, the details put out in the public by the government so far are enough to analyse its merits or lack thereof.

Here is a brief summary of the main guidelines of the draft policy:

- Covers private and commercial vehicles older than 20 and 15 years respectively;
- These older vehicles will have to go through a fitness test which would cost around Rs 40,000 (fitness certificate applicable for five years). They will have to pay ‘Green Tax’ too which would be in range of 10-25 per cent of road tax (up to 50 per cent in cities with high level of pollution);
- The government will provide monetary incentive to those who send their vehicles to the scrap heap.

Target of the scheme is 51 lakh light motor vehicles (LMV) that are above 20 years of age, 34 lakh LMVs above 15 years and 17 lakh medium and heavy motor vehicles above 15 years. That’s slightly more than a crore vehicles. Even if we assume average scrap value of these vehicles to be Rs 20,000 on the conservative side, that’s a Rs 20,000 crore initiative.

Additionally, it’s more important to take old commercial vehicles off the road because though they constitute about 5 per cent of the total vehicle fleet, they contribute around 65-70 per cent of total vehicular pollution. And vehicles older than 20 years constitute 1 per cent of the present fleet but contribute to 15 per cent of total vehicular pollution, as per a release by the government of India.

So, Rs 20,000 crore budget is still on the conservative side given that 17 lakh vehicles will need to be given higher financial incentive.

While this is a welcome move by the government, the Centre should rather focus on making it a one-time initiative (like the highly successful ‘cash for clunkers’ initiative in the United States) rather than a continuing one.

There should be sticks, not carrots, for private vehicles older than 20 years and commercial ones older than 15. There is no point in allowing them to keep plying on roads for such a long period and there should be a complete ban on them.

The scrappage of or trading in old vehicles for cash rebate kind of policies (carrots) should be aimed at vehicles which are still relatively newer — say petrol cars more than 10 years old (or 8 years in case of diesel). The same time criteria can apply for commercial vehicles as well. This scheme worth at least Rs 30,000 crore can be operated annually.

This is in line with practices in advanced Western economies where vehicles start qualifying for trade-in or scrap after 10 years. (Read this)

While it may appear to be too much of a burden, it’s only one-fifth of the amount that the government gets as GST revenue from sales of automobiles in the country. Plus, the extra revenue that the government will get in the form of higher goods and services tax (GST) due to sale of more cars (by those who will sell their old ones for a rebate).

Then there are environmental benefits in addition to jobs created in the manufacturing sector. Additionally, given how important automobile sector is to manufacturing part of the economy, positive benefits to the economy and growth in general should also be kept in mind. In fact, this will be no less than a production-linked incentive scheme that the government is contemplating.

It will be a win win for economy, jobs, environment and health of the people. The government has a great opportunity to come up with a very effective solution to many problems. It shouldn’t let it go waste.