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Flashback
Early 2009: US was reeling under the shock of a financial meltdown that was snowballing into a growing recession. Consumer spending froze, as individuals were dazed by deep erosions in the values of their equity holdings and their home values. They started postponing non-essential purchases - like consumer durables, which aggravated recessionary fears. The US Government came up with a novel idea - a program that quickly got a colloquial tag of "cash for clunkers".
In July 2009, the US Government unveiled its "Car Allowance Rebate System" under which US consumers could trade in old (and less fuel efficient) cars, purchase new (and fuel efficient cars) and get a one-time handsome rebate or discount on the purchase of the new car. You effectively got good cash for trading in your clunker (old car) for a new car - hence the terminology "cash for clunkers".
The impact was fantastic - despite the pall of gloom in the economy, consumers saw a great deal - which was also a limited period offer. The US Government had allocated US$ 1 billion for this program's subsidy element. This amount got exhausted within 30 days itself, prompting the Government to enhance it to US$ 3 billion. That too got exhausted in the second month, after which the Government stopped the scheme. It had more than met its objectives. In less than 2 months, around 1.5 million old vehicles were traded in for new - thus giving a tremendous spike to car sales and of course reduced pollution as a result of scrapping 1.5 million old polluting vehicles.
Why is this story relevant for us and why now?
Well, the Indian Government is currently working on our very own desi avatar of cash for clunkers program, which will involve not just old cars but old trucks as well.
As we all know, the National Green Tribunal had banned diesel vehicles older than ten years old from plying on the roads of New Delhi. This was later overturned by the Supreme Court. The Delhi Government has been experimenting with its odd-even scheme in a bid to reduce air pollution, but evidence doesn't really suggest any tangible benefits from the experiment. What is needed is for owners of old polluting vehicles to decide to scrap their old vehicles (and not sell them in the secondary market) and opt for new vehicles which have better pollution control equipment. What we need, is a desi version of cash for clunkers.
The Society of Indian Automobile Manufacturers, SIAM, has come up with a practically workable scheme towards this end. It proposes that all vehicles older than 15 years be allowed to scrap. And the good news is that the Government is favourably inclined to implement such a scheme.
Owners' benefits
Owners of old and polluting vehicles stand to gain big time from such a policy. Firstly they will get a brand new vehicle at a fat discount. It is estimated that as much as 50% of a vehicle's cost comprises of excise duties and other taxes. If current taxes are slashed in half, as in SIAM's proposal, vehicle owners would stand to gain a handsome amount from reduced taxes in addition to the scrap value of the old vehicles. It is estimated that the gains would be from Rs. 50,000 for car owners to up to Rs. 1,50,000 for owners of bigger vehicles. Moreover new vehicles will be able to ply for long years without repairs, while better fuel efficiency would make them more profitable. Owners will also gain from the warranties etc. extended to new vehicles.
Benefits to the Government
The government also stands to gain. Sales of so many new vehicles would not happen but for the scheme. As large numbers of new vehicles are purchased under the scheme, revenues will almost certainly go up. Despite the reduction in taxes, the exchequer would benefit from the increased number of vehicles sold. Indeed, by some estimates, the government would stand to gain by up to Rs. 23,000 crores in revenues.
Benefits to the economy
US wasn't the only country to implement a cash for clunkers program - UK, China and Japan too emulated the US. The big beneficiary of such a move is the automobile and auto ancillary industries - which are a significant part of the economy as well as the stock market in India. Further, since imports of steel scrap would be reduced, this would save foreign exchange. When the scheme is fully operational a saving 5 or 6 million tonnes of scrap metal every year can be obtained. If the scheme is put into practise with the seriousness it deserves, shares of automobile and auto ancillary companies should see an upward re-rating.
Benefits to the environment
Delhi may be an extreme case of air pollution, but most other cities in India are not too far behind. If we manage to get all the old highly polluting trucks and cars off the roads for good, and have newer vehicles that adhere to modern pollution control norms in their place, surely that's a big win for the environment, for all of us.
Possible contours of the scheme
For successful implementation, the Society of Indian Automobile Manufacturers, SIAM, suggests the following:
1) Encouragement to the last owner to scrap the old vehicle
2) Provision of environment friendly scrapping of the vehicle by notified agencies eg: MSTC (the government controlled company for trading in metal scrap) in the presence of RTO officers.
3) RTO to de-register the vehicle and issue a Scrappage Certificate or Certificate of Destruction (CoD) to the registered owner.
4) Scrappage Certificate to be treated as a tradable certificate for availing various incentives.
In order to initiate this scheme, the Road Transport Authorities should authorise nodal agencies eg: MSTC for setting up Scrap Yards across the country. (Firstpost May 23, 2016) To attract vehicle owners to upgrade, SIAM proposes that 50% of the excise duty be waived off on the new purchases.
Operational details
According to SIAM's scheme, the vehicle owner, after informing the dealer of his desire to take advantage of the scheme, hands over the old vehicle with all the necessary documents. The dealer sends the vehicle for scrapping to authorised scrapping yards. The value generated by scrapping would be shared 85% by owners and 15% by the dealers. The fact of scrapping is certified by the Regional Transport Authority which issues a Certificate of Destruction, COD. The customer on receipt of the COD becomes eligible for all the incentives of the scheme. The customer would be allowed to buy a new vehicle in the same category as the one surrendered. The COD would also be tradable in the state of union territory where the vehicle is scrapped. The dealer sends the COD to the manufacturer, who adjusts the tax reliefs in his books of account and passes on the benefit to the customer. The dealer sells the vehicle at the lower price.
A win-win-win-win policy
The whole thing sounds great, but is still only at the policy making stage. We must await the actual scheme and the official announcement. Nitin Gadkari, Minister for Surface Transport believes there is an urgent need for such a policy, which gives us hope that we will see this policy rolling out sooner rather than later.
The Society of Indian Automobile Manufacturers, SIAM, believes that "this scheme will have benefits of reducing pollution, reducing fuel consumption and improving safety (reducing fatalities from 1,40,000 people presently killed annually in road traffic crashes)." (Firstpost May 23, 2016). What SIAM won't say out too loudly, for obvious reasons, is the bonanza that awaits the automobile sector, when the policy gets announced.
A cash for clunkers policy, it appears, is a win-win-win-win policy - a win for consumers, for industry, for the Government and for the environment. Keep a close watch on newsflow on this exciting new policy initiative, give your clients a well-rounded heads-up before it becomes breaking news in the media.
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