Several newspaper headlines in recent times have been proclaiming, “Scrappage policy soon to give impetus to the automobile industry.” Apparently, the government will shortly announce a policy that encourages the scrapping of older automobiles, thereby boost new purchases, which, the policymakers expect, will help the automobile industry come out of the depression that it has sunk into.
The policy, one hears, is to adopt a two-pronged strategy of dis-incentivising the older polluting vehicles, and promoting the scrapping of older vehicles in authorised scrapping centres in an “environmentally friendly” way.
The onus apparently is on the original equipment manufacturers (OEMs) to play a critical role in this: to facilitate the collection of scrapped vehicles, ensure supply of new vehicles (but of course), as well as provide incentives in the form of discounts or additional benefits to the buyers of new vehicles in lieu of the older scrapped vehicles.
The government also believes that to drive away older polluting vehicles, we need deterrents. One of them is raising registration fees by significant sums (25 times, is what one hears!), after the completion of 15 years of life. The other is to exempt registration fees for new electric vehicles altogether.
Will these measures work in rejuvenating the automobile industry? Will they mitigate the issues of vehicular pollution? I really doubt it.
The setting up of regulated scrapping centres is a good move, and is long overdue. Though it has been proposed and discussed for the last four years, it’s only now that the government seems to be taking the necessary steps to set standards and issue guidelines (all off which are available in Europe and North America, and should be emulated, with minor exceptions).
Old vehicles, in poor condition, ought to be scrapped, both from pollution and safety points of view. This calls for execution in a proper, systematic way by which important parts can be salvaged for reuse, and the rest destroyed and/or recycled correctly.
Europe, North America, Japan and other developed markets have been following this voluntary vehicle scrappage system for years now. Yet it has not had any impact in improving the “lot of the automobile industry” in any of these countries.
In United Kingdom, which has pushed for voluntary scrappage schemes over the last few years, four-wheeler vehicle sales fell from 1.82 million to 1.6 million between 2016 and 2018, a drop of over 12% in two years.
Of course, several other reasons, including the uncertainty of Brexit, amongst others, must have caused this recession, but the voluntary vehicle scrappage scheme does not seem to have helped matters.
Cash for Clunkers
During the financial crisis of 2008-2010, when the Western economies were in serious trouble, incentivising the British automobile industry with the scrappage scheme, really helped. The scheme was known as “cash for clunkers,” a phrase to describe a system of scrappage of older vehicles, replacing them with newer, “cleaner” cars, with cash incentives doled out by the government.
Introduced by the British government on 22 April 2009, British citizens who had a car, which was at least 10 years old or more, when scrapped, could apply for £2,000 (Rs1.8 lakhs) funding at the time of purchase of a new automobile.
Similar schemes were also launched by France, Spain, Italy and Germany, and for the latter, car sales surged by 11.5% during January and May 2009 (Germany had introduced the scheme on 13th January 2009). During 2009, car sales recovered significantly in France and the UK too, after a disastrous 2008.
The recovery of the industry came at a price though: it cost the British exchequer $500 million (Rs3,500 crore), the French $554 million (Rs3,870 crore), $3 billion (Rs21,000 crore) for the Spanish a whopping $7.1 billion (Rs50,000 crore) for the Germans!
Yet there was a Keynesian economic reasoning in boosting demand, which these cash rebates could do, by stimulating the economy, and escaping from what John Maynard Keynes called a “liquidity trap.” Even if the government had needed to plough in money in the shorter term, most governments expected to earn back most of it through the rise in car sales and economic activity, which, in turn must have generated more taxes, and so on.
The current Indian government’s thinking though may not be along those lines. So, what could be the alternative? We will discuss that in the next part.
(Gautam Sen is acknowledged globally as a leading automotive journalist, writer, automotive design consultant and expert from India. He founded the country’s first newsstand car magazine Indian Auto in 1986, followed by Auto India, Auto Motor & Sports and BBC’s TopGear. Mr Sen has also been directly involved with the automobile industry in India and Europe, and has worked with eminent designers such as Gerard Godfroy, Tom Tjaarda and Marcello Gandini