Incentives key to ‘cash for clunkers’ success

Already, the prices of automobiles have gone up sharply over the past few years due to regulatory costs, technology upgrades and input costs.

If India’s ‘cash for clunkers’ scheme is to take off, it will require the concerted efforts of the Centre, the state governments, automobile manufacturers and business enterprises who set up the scrappage centres. Indeed, the timelines are short—April 2023 for heavy commercial vehicles(CV) and a year more for private vehicles. It is difficult to see too many scrapyards coming up in so short a time, let alone a fitness centre in each of the country’s districts.

To be sure, the ecosystem being envisaged is an elaborate one, a far cry from the existing informal infrastructure, and could turn out to be a good business opportunity. One estimate puts the number of light motor vehicles that are over 20 years old at 5.1 million and those that are more than 15 years old at 3.4 million. Nonetheless, venturing into the business will not be simple given the costs involved, including that of leasing large land parcels and the accompanying infrastructure. At this juncture, investments of Rs 10,000 crore appear somewhat ambitious unless the Centre sweetens the deal for businessmen.

There’s no doubt that the policy will leave the air a lot less polluted; about a fourth of the pollution in Delhi is attributed to vehicles. Moreover, it should stimulate demand for new automobiles. But, to push owners of old and toxin-spewing vehicles—private and commercial—to sell these as scrap will need some coaxing. To begin with, the states must be willing participants, especially when it comes to offering rebates on various taxes. Motor vehicles are in the Concurrent List of the Constitution and, consequently, some of the tax breaks that have been baked into in the scheme will need to be ratified by state governments. Given the scheme will create demand for new vehicles, they should have no qualms about these; they should, for instance, allow transfers of taxes that have been levied for a lifetime, or even a year to the new vehicles against proof of the older vehicles having been scrapped.

If owners are to trade in their unfit vehicles in large numbers, state governments must offer rebates on road-tax that are typically 10-14% of the vehicle price. The proposed levels are up to 25% for PVs and 15% for CVs, but the fear is that the states would be unwilling to offer such high rebates. One would need to see whether they waive registration fees or offer discounts for new vehicles against scrapping certificates. Automobile-makers are somewhat reluctant to offer a 5% discount on the new vehicles as has been proposed; they fear this will crimp their already-small margins.

They may be willing to offer 1-2% at the most. Also, they are believed to be against fixing a rate of 4-6% of the value of the vehicle (ex-showroom) as the scrap value and feel it should be left flexible. It is important that manufacturers come on board because, at the end of the day, they will be assisting owners with the scrapping. The sum of the incentives needs to be meaningful, else, vehicle owners will not be convinced.

Already, the prices of automobiles have gone up sharply over the past few years due to regulatory costs, technology upgrades and input costs. For its part, the Centre must be willing to offer meaningful incentives to those setting up scrappage units rather than putting the onus on the states whose finances are in bad shape. Else, it could be a long time before the scheme becomes a reality.