Monday, June 15, 2009

Cash for clunkers - Does India need one such scheme?

The US congress has approved the "Cash for clunkers" bill. Under this bill, the government buys in the old gas guzzling vehicles (both cars and trucks) for a reasonable amount and gives the seller incentive to buy new environmentally-friendly vehicles. By environmentally-friendly vehicle I don't really mean a hybrid car, but any car with a better mileage. This bill is based on the proposal made by the Princeton economist Alan Blinder, an year ago in the New York Times Op-Ed.

According to Alan Blinder, this scheme brings out multiple advantages. The most important of them: a cleaner environment, as we can get rid of the old polluting vehicles easily; an effective stimulus for the auto manufacturing industries, since the people who sell the old car usually buy a new car with a better mileage; reduced dependence on fossil fuels.

This scheme has been criticized by the University of Chicago professor, Steven Levitt:
If any vehicles are going to qualify under this program, I suspect it will be because enterprising people who already plan to buy new cars will go out and buy old junkers on the used-car market and then trade them in under the program. But those transactions won’t represent incremental new car sales; it will just be a way for people who were already going to buy a car to rip off the government.

One thing will happen: entrepreneurs will play the role of the middleman, buying old beaters and then reselling them to people who are about to buy new cars, skimming off a little profit along the way.

But of course, every scheme and every bill would have exploiters and scope for abuse. During the implementation, the US government has to bring in restrictions to ensure that some greedy miscreants do not cash in on this.

Now for the bigger question. Does India need one such scheme? The problem is smaller and different in India compared to the US. There has been a huge increase in the number of cars only after 2000, so there are not many gas guzzling cars on Indian roads. The graphs below (Courtesy: Automobile India) show the sales of cars in units after 2000, until 2006-07.

In 2007-08, the domestic car sales increased by nearly 12%. In 2008-09 the growth has shrunk to 3.44%, in spite of the 54% increase in the car export. So even though the Indian car industry needs a stimulus to catch up with its old figures, it is still better off compared to the rest of the world. Moreover much of our environmental pollution is attributed to the bad roads, adulterated petrol and clogged up traffic rather than the cars themselves.

What about trucks in India? There are still a lot of old, polluting trucks in India (I don't have any statistics to back this up. Readers, help). I would also assume that cumulatively trucks in India travel more miles in a year than all cars in India put together. So India can still introduce a Cash-for-clunkers scheme to encourage the truck owners to refurbish their clunkers. It would certainly help the truck industry and the environment. Additionally if the truck owners replace their clunkers with a new truck having a better tonnage, it would speed up the goods movements within India. With proper regulation, if India introduces Cash-for-clunkers scheme for trucks, I am confident that it would be welcome by environmentalists, All-India Interstate lorry owners association, truck makers, and more importantly the citizens of India.


  1. Good Thought..Yes!"Cash for clunkers" is must in India. atleast for the private transport. But, is it practically possible to scrap the existing trucks and other vehicles? Can our economy afford it? Remember 50% of indian trucks run on informal economy carrying goods that do not add to the GDP.

  2. @Raghav
    Good questions. Can India's economy afford it? Not easy to answer. Probably yes, since the country is just going to offer a small incentive for truck purchase.

    "..Remember 50% of indian trucks run on informal economy carrying goods that do not add to the GDP."
    That's OK. After all we have seen, GDP is not the unified indicator of economy. With better trucks, if we can move goods to and from the harbor at a higher efficiency, it is worth the price. Besides it would also save some automobile engineering jobs.