Explained | Voluntary Vehicle Fleet Modernisation Programme

The story so far: Prime Minister Narendra Modi recently launched the Voluntary Vehicle Fleet Modernisation Programme to encourage the scrapping of old vehicles. The Centre claims that the scheme will help boost economic growth by increasing demand for automobiles by as much as 30%.

Also read: Automotive sector welcomes vehicle scrappage policy

What is the new automobile scrappage policy?

Under the new scheme, passenger vehicles older than 20 years and commercial vehicles older than 15 years will need to undergo a mandatory “fitness” test. During the test, the vehicles will be evaluated on a number of safety and environmental standards at various testing centres set up by the government.

If the vehicles do not meet the standards set by the government, they will have to be scrapped. The owners of the vehicles will be paid around 5% of the vehicle’s ex-showroom price. In addition, owners will also be eligible to receive various discounts and tax rebates when they purchase new vehicles after selling their old ones.

The primary purpose of the scheme seems to be to get old vehicles that pollute the environment off roads and to accelerate economic growth and job creation. According to the Federation of Automobile Dealers Association of India, about 52 lakh cars and 37 lakh trucks currently plying on Indian roads may be eligible to be scrapped under the Centre’s new scheme.

How will the new policy help the economy?

The various incentives given to vehicle owners may well encourage them to ditch their old vehicles in favour of new ones. This could, of course, lead to a rise in demand for new automobiles and help the struggling automobile sector.

The Centre’s scrappage scheme is, in fact, similar to the used vehicles scrappage programmes in various developed countries. For example, the cash-for-clunkers programme introduced in the United States after the 2008 recession helped boost new car sales.

However, not all economists are excited about the economic benefits of such programmes. Critics such as French economist Frederic Bastiat have argued that such programmes merely reallocate resources within the economy rather than create any new wealth. They say that the raw materials, labour and other scarce resources that go into making new cars would instead be used in other sectors of the economy in the absence of cash-for-clunkers schemes.

Moreover, since such programmes are funded using taxpayer money, they may add to the overall tax burden on citizens and, in fact, discourage economic growth. Some also believe that there may be much better ways to control pollution than through subsidies.

What lies ahead?

Analysts expect the sale of new cars and trucks to receive a boost due to the incentives offered by the government. However, there are various challenges that are likely to crop up during the implementation of the new policy. The success of the programme will depend primarily on the incentives that government officials themselves have to set up new testing centres and to uphold safety and pollution standards. Unlike private scrap dealers who have a direct financial incentive to set up the necessary infrastructure, government bureaucrats do not have such strong incentive. There is also the risk of the new rules opening up more rent-seeking opportunities for government officials. Further, the new safety and environmental standards if implemented as planned, by reducing the effective life of a vehicle, may affect buyer decisions.