Ineffective nudge

| Updated on January 29, 2021

The sketchy scrappage policy may neither promote replacement nor spur the economy

A scrappage policy to take polluting vehicles off the roads and revive India’s automotive sector has been a much-anticipated feature of India Inc’s Budget wish-lists for five years now. But after multiple rounds of consultation, it is disappointing to see the Ministry of Road Transport flag off a watered-down scheme with rather sketchy contours this week. The original scheme, conceived in 2016 and tweaked in 2018 and 2019, envisaged providing positive incentives, in the form of excise duty cuts and price discounts to owners who decided to replace their clunkers with less-polluting alternatives. Ambitious plans were then mooted on transforming India into a global recycling hub, so that auto waste could be efficiently recycled to reduce costs for local industry. But after a repeated shifting of goalposts, the latest proposal makes no mention of incentives at all. It instead suggests that States levy a ‘green tax’ layered on to the existing road tax, on owners of older vehicles to promote scrappage.

The scrappage policy based on negative nudges may prove less than effective on three counts. One, commercial vehicles well past their prime are the main offenders on emissions. Affordability is the primary factor that decides if the small fleet operator in this fragmented industry sees economic logic in replacing his trucks. Given that these operators are just recovering from the body blow dealt by Covid-related restrictions, it seems rather unkind to levy a green tax on them when they seek to renew their fitness certificates. As the cost of a new truck may far outweigh the proposed levy, small operators may well choose to cough up the tax rather than scrap their vehicles. It also isn’t clear why the scheme proposes to give a long rope to affluent personal vehicle owners by taxing their 15-year-old vehicles, while setting the bar at 8 years for truck owners. Two, to create a knock-on effect on the economy, a scrappage scheme must trigger large-scale vehicle purchases. The proposed one however dilutes this intent by nudging vehicle owners to consider scrappage only when their fitness certificates are due for renewal. It is doubtful if the scrappage of 15-year-old vehicles owned by the Government and PSUs alone, as proposed, will provide the necessary stimulus. Three, to ensure that the scrappage policy doesn’t create new environmental hazards, an ecosystem for recycling scrapped vehicles is a pre-requisite.

By the Ministry’s admission, it is commercial vehicles of over 20-year vintage, making up about 1 per cent of the fleet size, that account for much of India’s vehicular pollution. There’s no reason why a cash-for-clunkers scheme relying on incentives cannot be rolled out for this segment alone.

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Published on January 29, 2021
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