Has India found an auto policy that’s good for the economy and for its air?

Image: REUTERS/Hemanshi Kamani
We may earn a commission from links on this page.

In an attempt to save India’s shrinking economy, the Narendra Modi government has taken a leaf out of the playbook that several countries used to battle the 2008 global financial crisis. But for the trick to really work, the move must be localised to India instead of a blind copy-paste of the West.

In the union budget for 2021-22 (April-March), Indian finance minister Nirmala Sitharaman introduced a voluntary vehicle scrapping policy. Under this, cars older than 20 years and commercial vehicles older than 15 years will be phased out from the roads. These vehicles will need to undergo a test at automated centres to determine whether they are fit for driving or need to be scrapped, Sitharaman said in her budget speech (pdf) on Feb. 1, without further details.

“This will help in encouraging fuel-efficient, environment-friendly vehicles, thereby reducing vehicular pollution and oil import bill,” she added.

The move will impact over 20 million cars in India and is aimed at improving India’s “filthy air,” while boosting automobile demand, which has been under pressure for nearly a year now due to the Covid-19 pandemic.

If global trends are anything to go by, the step will be pretty effective, industry experts said, adding that there are some things the Indian government must do differently.

“Countries like the US, Germany, UK, and Japan had introduced incentive-based scrappage policy, which boosted their demand massively in the subsequent quarters,” explained Shruti Saboo, associate director at New Delhi-based India Ratings and Research. “However, given the price-sensitive nature of Indian consumers and the fact that they are still recovering from the financial impact of Covid-19, the incentives for scrapping older vehicles have to be really attractive.”

A brief history of scrapping cars

After the 2008 crisis, several countries, including Japan, the US, and some European countries implemented the scrappage policy. The motive was to push the auto sector out of a slump.

While India did not come up with such a policy then, countries like Russia announced schemes such as subsidised loans for customers to buy locally produced cars. On the other hand, South Korea accelerated the auto demand by providing incentives in the form of tax cuts to consumers (pdf).

Some of the biggest car scrapping schemes that have been announced so far are by the US, the UK, France, Spain, and Germany. Just like India, the objective of the policy across these nations was two-fold: support the automobile industry and ensure environmental benefits.

These policies have shown results when it comes to the environment.

“Under the US’ Car Allowance Rebate System, the fuel efficiency of the new cars purchased was 58%  greater than that of the old cars traded-in,” economist Arne Schweinfurth said in a research paper about the efficiency of such policy (pdf) 2009. ”The schemes seem to have steered buyers toward smaller, more fuel-efficient vehicles.”

But in a developing country like India, environmental benefits are unlikely to be big selling points.

What India’s vehicle scrapping policy needs

Automobiles that are 15-20 years old have a very low resale value, which would not cover the cost of buying a new vehicle. So, if the Modi government wants Indians to mandatorily give up their vehicles, it would need to include a lucrative monetary compensation in return.

“If the consumer does not find significant financial incentives in scrapping the vehicle, they may decide against it,” said Vahishta M. Unwalla, research analyst at CARE Ratings. “Some of the customer-based incentives could include discounts on buying a new vehicle in lieu of scrapping their old automobile. There should be some tax-based benefits for the original equipment manufacturers as well.”

An HDFC Bank study in 2018 (pdf) estimated the industry for the scrapping of older vehicles and recycling of automotive parts in India is worth $6 billion.

If the government can manage to make the deal viable for Indians, the move could end up giving some additional benefits. For instance, when replacing their outdated vehicles, users could be encouraged to purchase more environment-friendly electric vehicles (EVs).

“It will push the mindset of people to adapt to cleaner commute and open the market for brand new vehicle infusions which can be EV and help the manufacturing industry to grow,” said Suhas Rajkumar, founder of a Bengaluru-based EV startup, Simple Energy.

Other benefits of the policy could include re-using scrap materials like steel and aluminium for manufacturing new vehicles.

But there are several pitfalls to this ambitious plan.

For instance, disposing of automobile parts that cannot be reused in an ecological way could pose a big challenge. While most of the parts of a car, including belts, wheels, and seats, can be easily recycled, components such as batteries, headlamps, video display screens, switches, and sensors cannot be reused. Old car batteries mostly contain sulphuric acid, a toxic and corrosive chemical, which can cause soil and groundwater contamination if not stored with caution.

Besides, creating efficient infrastructure to deal with such a massive overhaul will be a task in itself. “The government will require infrastructure especially in terms of setting up of organised scrapping centres, which is currently largely confined to small unorganised players,” said Saboo of India Ratings and Research.

Given that the fine print of the policy has not yet been shared by the government, experts are now waiting to understand who will bear the cost of the project. They also believe that the move could have benefits beyond just boosting auto demand and helping the environment.

Vehicle scrapping and informal jobs

The scrappage policy will generate employment in the informal sector at a time when unemployment rates in India are at a record high, analysts said.

“The informal sector plays an important role in the collection, dismantling, and recycling of end of life vehicles. The spare part recovery business generates livelihood and also serves the market for in-use vehicles,” said Anumita Roychowdhury and Vivek Chattopadhyaya, analysts at Centre for Science and Environment, a New-Delhi based think tank.

Due to the Covid-19 pandemic, in December 2020, the unemployment rate in India rose to 9%, with as many as 9 million people losing jobs between September and December.