Auto scrappage policy a success globally, but govt must avoid the pitfalls

A well-implemented policy will not just help boost demand for motor vehicles, but will also help create jobs and alleviate the consumption and demand slowdown across demographics

If the success of any policy is measured by how much it resonates with various governments around the world, then the automobile scrappage policy has been quite successful. In the aftermath of the 2008 global financial crisis, more than 18 nations had implemented scrappage policy as a way to combat economic slowdown.

Now as the Narendra Modi government squares up the reality of India’s April-June quarter gross domestic product growth coming in at 5 per cent, the lowest in six years, it has realised the potential of a well-implemented scrappage policy, not just in boosting demand for motor vehicles, but also in creating jobs and alleviating the consumption and demand slowdown across demographics.

Business Standard has learnt that the Prime Minister’s Office is directly monitoring the preparation of a scrappage policy, and wants it to be the joint effort of various departments. This means that an initiative which was originally being spearheaded by the Ministry of Road Transport and Highways now includes Niti Aayog, and the commerce and environment ministries as well, and is being overseen by PMO.

What is a scrappage programme?

Simply put, a scrappage programme is a government initiative to promote the replacement of old vehicles with modern ones. As such, scrappage programmes generally have the dual aim of stimulating the automobile industry and taking inefficient, more polluting vehicles off the road. However, the Modi government is also examining the development of supporting infrastructure, including huge scrappage yards with modern crushing technology and recycling hubs, all of which is expected to lead to job creation.

The most well-known scrappage policy has been the Car Allowance Rebate System (CARS) in the United States, also known as ‘cash for clunkers’. It was a $3 billion federal programme during former President Barack Obama’s first term. The amount of credit given to people exchanging cars less than 25 years old for newer, efficient models ranged between $3,500 and $4,500, according to media reports at the time. The programme was supposed to run from July to November 2009, but turned out to be so popular that appropriated funds were exhausted by late August. Reports quoted the National Highway Traffic Safety Administration as saying that 23,000 car dealers had participated and 240,000 vehicles were sold under the programme.

Another successful example is that of Germany, which was the first to introduce a scrappage policy and was an inspiration for ‘cash for clunkers’ and other federal scrappage policies worldwide. Known as the German Accelerated Vehicle Retirement Program, it aimed to give 2,500 euros premium to each customer exchanging an old car for new. Costing the German government 1.5 billion euros, it is estimated that some 350,000 orders were placed under the scheme, making it the biggest such initiative in the world.

However, some studies criticised the scheme, saying that a majority of those car sales would have happened anyways. Which means even people who were planning to buy cars irrespective of scrappage benefits pocketed the sops. The United Kingdom’s vehicle scrappage scheme came under the exact same criticism. Herein lies the first challenge for the Modi government. Can there be an effective way to ensure that any rebates from an Indian scrappage policy are targeted to reach those car buyers who actually need them?

In Germany, as well as in the United Kingdom, France and other European countries, the segment which most benefited from the scrappage policy was budget cars like hatchbacks and family sedans, and not executive and luxury segments dominated by the likes of Mercedes Benz, Audi and BMW. In India, will there be a way to ensure that consumers who can afford luxury vehicles and whose car ownership spans are shorter anyway, are kept out of the proposed scrappage policy?

Then there is the question of timelines. Most of the scrappage policies were for a limited time period, from a few months to a year. However, some have gone on longer and still exist. The one in Romania lasted 15 years from 2000 to 2015, Russia’s scrappage policy ran in 2010 and 2011 and was relaunched in 2014, and the one in Netherlands still continues.

This will be another question the government will have to ponder over. Will the upcoming budgets have enough fiscal space to continue with a scrappage policy year after year or will there be a sunset clause and end dates to such a scheme?

Among these examples, Romania stands out for one reason. The scheme was actually started in 2000 by an automaker, Dacia (now owned by Renault), and it was only in 2005 that the Romanian government stepped in and started providing rebates out of its budget.

This will be another question the government will have to ponder over. Will the upcoming budgets have enough fiscal space to continue with a scrappage policy year after year or will there be a sunset clause and end dates to such a scheme?

Among these examples, Romania stands out for one reason. The scheme was actually started in 2000 by an automaker, Dacia (now owned by Renault), and it was only in 2005 that the Romanian government stepped in and started providing rebates out of its budget.

Auto scrappage policies across the globe
Country	Time Period	Impact in brief
Germany

January-December 2009 Largest in terms of vehicles sold, with budget of 1.5 billion euros. Boosted sales of smaller cars more than luxury vehicles

United States 

July-August 2009 A federal budget outgo of $3 billion, some 2,40,000 vehicles said to be sold United Kingdom  April 2009-March 2010 300-million-pound outlay in the 2009 UK Budget, a further 100 million pounds provided later. Carmakers and government each provided a 1000 pound benefit per purchase China  June 2009-end 2010 Initial rebates of $450-900 for trading in older cars and trucks for new ones. Later raised to $732-2,632. Expected to substitute 2.7 million polluting vehicles. In addition, Shanghai local govt offered similar incentives of $450-1,100 per vehicle to residents. Canada  February 2009-March 2011  ‘Retire Your Ride’ programme. Incentives for retiring vehicles made in 1995 or older. Over 120,000 vehicles permanently retired. Automakers started their own scrappage schemes to augment govt programme France   January 2009-2017 Car would need to be older than 10 years and new one would need to meet a certain emission standard. Rebates started at €1,000 and went upto €5,000 depending on emission norms and a "super-bonus" for scrappage of old car. The program was replaced by a new one called Prime à la conversion in 2017.

Russia 

2010-11, relaunched in 2014  Original scheme, between 2010-11, allowed owners of light cars older than 10 years to receive a subsidy of about $1,751 if they bought a new Russian-made car. After relaunch, now offering incentives of at least 825 euros for cars that were at least 6 years old. Total of 670,000 certificates issued in both phases. Japan  April 2009-March 2010  Scheme offered up to $2,500 to trade in vehicles 13 years or older for newer, environmentally friendly cars. Govt also included a tax break on gasoline-electric hybrid vehicles and other low emission cars and trucks, allocating $3.7 billion for the programme.