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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • Govt. mulls allowing local sales by SEZ units sans import tag

    The government is considering a proposal to allow producers in Special Economic Zones (SEZs) to sell their output to the domestic market without treating them as imports.

    What are SEZs?

    • A Special Economic Zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
    • SEZs are located within a country’s national borders, and their aims include increasing trade balance, employment, increased investment, job creation, and effective administration.
    • To encourage businesses to set up in the zone, financial policies are introduced.
    • These policies typically encompass investing, taxation, trading, quotas, customs, and labor regulations.
    • Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.

    SEZs in India

    • The SEZ policy in India first came into inception on April 1, 2000.
    • The prime objective was to enhance foreign investment and provide an internationally competitive and hassle-free environment for exports.
    • The idea was to promote exports from the country and realizing the need for a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally.
    • Subsequently, the SEZ Act 2005, was enacted to provide the umbrella legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.

    Who can set up SEZs? Can foreign companies set up SEZs?

    • Any private/public/joint sector or state government or its agencies can set up an SEZ.
    • Yes, a foreign agency can set up SEZs in India.

    What is the role of state governments in establishing SEZs?

    • State governments will have a very important role to play in the establishment of SEZs.
    • A representative of the state government, who is a member of the inter-ministerial committee on private SEZ, is consulted while considering the proposal.
    • Before recommending any proposals to the ministry of commerce and industry (department of commerce), the states must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc.

    Are SEZs controlled by the government?

    • In all SEZs, the statutory functions are controlled by the government.
    • The government also controls the operation and maintenance function in the central government-controlled SEZs. The rest of the operations and maintenance are privatized.

    Are SEZs exempt from labor laws?

    • Normal labor laws are applicable to SEZs, which are enforced by the respective state governments.
    • The state governments have been requested to simplify the procedures/returns and for the introduction of a single-window clearance mechanism by delegating appropriate powers to development commissioners of SEZs.

    Who monitors the functioning of the units in SEZ?

    • The performance of the SEZ units is monitored by a unit approval committee consisting of a development commissioner, custom, and representative of the state government on an annual basis.

    What are the special features for business units that come to the zone?

    • Business units that set up establishments in an SEZ would be entitled to a package of incentives and a simplified operating environment.
    • Besides, no license is required for imports, including second-hand machinery.

    How do SEZs help a country’s economy?

    • SEZs play a key role in the rapid economic development of a country.
    • In the early 1990s, it helped China and there were hopes that the establishment in India of similar export-processing zones could offer similar benefits – provided, however, that the zones offered attractive enough concessions.
    • Traditionally the biggest deterrents to foreign investment in India have been high tariffs and taxes, red-tapism, and strict labor laws.
    • To date, these restrictions have ensured that India has been unable to compete with China’s massively successful light-industrial export machine.

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  • Why is there a push for Asset Monetization?

    Finance Minister has recently announced the framework for the National Monetization Pipeline (NMP) and its process is under discussion.

    What is Asset Monetization?

    • Asset Monetization involves the creation of new sources of revenue by unlocking of the value of hitherto unutilized or underutilized public assets.
    • Internationally, it is recognized that public assets are a significant resource for all economies.
    • Many public sector assets are sub-optimally utilized and could be appropriately monetized to create greater financial leverage and value for the companies and of the equity that the government has invested in them.
    • This helps in the accurate estimation of public assets which would help in the better financial management of government/public resources over time.

    What is the National Monetization Pipeline?

    • The NMP names a list of public assets that will be leased to private investors.
    • Only brown-field assets, which are assets that are already operational, are planned to be leased out under the NMP.
    • So, to give an example, an airport that is already operational may be leased out to an investor.
    • Assets that are yet to be developed, such as an undeveloped piece of land, for example, may not be leased out.
    • Importantly, there won’t be any transfer of ownership from the government to the private sector when assets are leased out.
    • The government only plans to cede control over its assets for a certain period of time, after which the assets must be returned to the government unless the lease is extended.

    Will NMP help the economy?

    • Better control and utilization: Economists generally believe that scarce assets are better managed and allocated by the private sector than by the government. So to the extent that the NMP frees assets from government control, it can help the economy.
    • Freeing Capital: The government believes that leasing out public assets to private investors will help free capital that is stuck in these assets.
    • Infra generation: The government can use this money, in turn, to build fresh infrastructure under the National Infrastructure Pipeline (NIP).
    • Economic boost: In fact, the proceeds from the NMP are expected to account for about 14% of the total outlay for infrastructure under the NIP. The government believes all this spending will boost economic activity.
    • A perfect model: Analysts also believe that the government has now through the NMP found the right model for infrastructure development.
    • Source of finance: The government, they say, is best suited to tackle the ground-level challenges in building infrastructure, while the private sector can operate and offer indirect finance to these projects through the NMP.

    For example, say the government has invested thousands of crores in a road project. It may take the government decades to recover its investment through the annual toll revenues.  Instead, the government can recover a good chunk of its investment by leasing out the right to collect toll for the next 30 years to a private investor.

    What are the risks?

    • Political lobbying: The allocation of assets owned by governments to private investors is often subject to political influence, which can lead to corruption. In fact, many in the Opposition allege that the NMP will favour a few business corporations that are close to the government.
    • Burden of opportunity cost: The expected boost to economic activity due to higher government spending may also need to be weighed against the opportunity costs. For one, the money that the government collects by leasing out assets comes from the pockets of the private sector. So higher government spending will come at the cost of lower private spending.
    • Legal uncertainties: The NMP also does not address the various structural problems such as legal uncertainty and the absence of a deep bond market that hold back private investment in infrastructure.
    • Sheer Privatization: There are also concerns that the leasing of airports, railways, roads and other public utilities to private investors could lead to higher prices for consumers. If the government merely cedes control of public utilities to private companies without taking steps to foster greater competition, it can indeed lead to poor outcomes for consumers.
    • Policy compulsion: The government’s past disinvestment projects such as the sale of Air India did not catch the fancy of investors owing to the stringent conditions set by the government. In the case of Air India’s sale, the buyers were supposed to possess a certain minimum net worth and stay invested in the airline for at least three years.

    What lies ahead?

    • The success of the NMP will depend on the demand for brown-field government assets among private investors.
    • Many analysts also believed that the government was expecting buyers to pay too much for a debt-ridden Air India.
    • The pricing of assets and the terms of sale will thus determine the level of interest that private investors show for assets leased under the NMP.
    • In the past, doubts have been raised about the allocation of airports and other assets to certain private business groups (say Adani Group).
    • So the process that the government adopts this time to allocate assets may come under scrutiny. There is likely to be a demand for an open, competitive auction of assets.

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  • Govt’s clarifications on CSR Expenditure

    The Ministry of Corporate Affairs has clarified that companies have to ensure that funds transferred to implementing agencies are actually utilized for them to be counted towards mandatory CSR expenditure.

    What is Corporate Social Responsibility (CSR)?

    • CSR is a type of business self-regulation that aims to contribute to the societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-oriented practices.
    • It rests on the ideology of “give and take” i.e. to take scarce resources from the environment for running a business, and in turn to contribute towards economic, social, and environmental development.

    CSR in India

    • India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to the Companies Act, 2013 in April 2014.
    • Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger as part of any CSR compliance.

    All companies with a net worth of Rs 500 crore or more, a turnover of Rs 1,000 crore or more, or net profit of Rs 5 crore or more, are required to spend 2 per cent of their average profits of the previous three years on CSR activities every year.

    What is the recent clarification?

    • The MCA has clarified that excess Corporate Social Responsibility (CSR) expenditure prior to FY21 cannot be set off against future CSR expenditure requirements.
    • Corporate donations to government schemes cannot be counted as CSR.
    • The ministry has also clarified that companies have to ensure that funds transferred to implementing agencies are actually utilized for them to be counted towards mandatory CSR expenditure.

    Impact of the move

    • This clarification may impact donations to state government schemes which are often done for the sake of managing relationships with the government.

    Earlier changes

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  • [pib] Bharat Series (BH-series) for Vehicles

    The Ministry of Road Transport & Highways has rolled out a new series for vehicles registration ‘BH’ to avoid re-registration of vehicles while moving to another state.

    Bharat series (BH-series)

    • There was a procedure of re-registration of a vehicle while moving to another state.
    • A vehicle bearing BH registration mark shall not require assignment of a new registration mark when the owner of the vehicle shifts from one State to another.
    • Format of Bharat series (BH-series) Registration Mark –

    Registration Mark Format:

    1. YY BH #### XX
    2. YY – Year of first registration
    3. BH- Code for Bharat Series
    4. ####- 0000 to 9999 (randomized)
    5. XX- Alphabets (AA to ZZ)

    Why such move?

    • Station relocation occurs with both Government and private sector employees.
    • Such movements create a sense of unease in the minds of such employees with regard to transfer of registration from the parent state to another state.
    • Under section 47 of the Motor Vehicles Act, 1988, a person is allowed to keep the vehicle for not more than 12 months in any state other than the state where the vehicle is registered.

    Who can get this BH series?

    • BH-series will be available on voluntary basis to Defense personnel, employees of Central Government/ State Government/ Central/ State PSUs and private sector companies/organizations.
    • The motor vehicle tax will be levied for two years or in multiple of two.
    • This scheme will facilitate free movement of personal vehicles across States/UTs of India upon relocation to a new State/UT.
    • After completion of the fourteenth year, the motor vehicle tax shall be levied annually which shall be half of the amount which was charged earlier for that vehicle.

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  • Liberalized Drone Rules, 2021

    The central government has notified the Drone Rules 2021, a much more liberalised regime for unmanned aircraft systems than what existed previously.

    Key features of Drone Rules 2021

    These rules are built on a premise of trust, self-certification and non-intrusive monitoring. The policy is designed to usher in an era of super-normal growth while balancing safety and security considerations.

    • Several approvals abolished: Unique authorisation number, unique prototype identification number, certificate of manufacturing and airworthiness, certificate of conformance, certificate of maintenance, import clearance, acceptance of existing drones, operator permit, authorisation of R&D organisation, student remote pilot licence, remote pilot instructor authorisation, drone port authorisation etc.
    • Number of forms reduced: from 25 to 5.
    • Types of fees: reduced from 72 to 4.
    • Quantum of fee: reduced to nominal levels and delinked with size of drone. For instance, the fee for a remote pilot license fee has been reduced from INR 3000 (for large drone) to INR 100 for all categories of drones; and is valid for 10 years.
    • Digital sky platform: It shall be developed as a user-friendly single-window system. There will be minimal human interface and most permissions will be self-generated.
    • Interactive airspace map: with green, yellow and red zones shall be displayed on the digital sky platform within 30 days of publication of these rules.
    • No permission required in green zones: Green zone means the airspace upto a vertical distance of 400 feet or 120 metre that has not been designated as a red zone or yellow zone in the airspace map; and the airspace upto a vertical distance of 200 feet or 60 metre above the area located between a lateral distance of 8 and 12 kilometre from the perimeter of an operational airport.
    • De-licensing: No remote pilot licence required for micro drones (for non-commercial use) and nano drones. No requirement for security clearance before issuance of any registration or licence. Nano and model drones (made for research or recreation purposes) are exempt from type certification.
    • Foreign ownership: No restriction on foreign ownership in Indian drone companies.
    • Import: Import of drones to be regulated by DGFT. Requirement of import clearance from DGCA abolished.
    • Size of drones: Coverage of drones under Drone Rules, 2021 increased from 300 kg to 500 kg. This will cover drone taxis also.
    • Testing of drones: for issuance of Type Certificate to be carried out by Quality Council of India or authorised testing entities.
    • UID: Manufacturers and importers may generate their drones’ unique identification number on the digital sky platform through the self-certification route. Drones present in India on or before 30 Nov 2021 will be issued a unique identification number through the digital sky platform provided, they have a DAN, a GST-paid invoice and are part of the list of DGCA-approved drones.
    • Penalties: Maximum penalty for violations reduced to INR 1 lakh.
    • Permission: Safety and security features like ‘No permission – no takeoff’ (NPNT), real-time tracking beacon, geo-fencing etc. to be notified in future. A six-month lead time will be provided to the industry for compliance.
    • Drone corridors: will be developed for cargo deliveries.
    • Drone promotion council: to be set up by Government with participation from academia, startups and other stakeholders to facilitate a growth-oriented regulatory regime.

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  • AERA Bill, 2021

    In the recent monsoon session, Parliament passed the Airports Economic Regulatory Authority of India (Amendment) Bill, 2021.

    Key features of the AERA Bill, 2021

    • It seeks to amend the Airports Economic Regulatory Authority of India Act, 2008.
    • The 2008 Act established the Airport Economic Regulatory Authority (AERA).
    • AERA regulates tariffs and other charges (such as airport development fees) for aeronautical services rendered at major airports in India.
    • The 2008 Act designates an airport as a major airport if it has an annual passenger traffic of at least 35 lakh.
    • The central government may also designate any airport as a major airport by a notification.
    • The Bill adds that the central government may group airports and notify the group as a major airport.

    Why has the definition of a major airport been amended?

    • The Amendment has changed the definition of a major airport to include “a group of airports” after the words “any other airport”.
    • The government hopes the move will encourage the development of smaller airports and make bidding for airports with less passenger traffic attractive.
    • It plans to club profitable airports with non-profitable ones and offer them as a package for development in public-private partnership mode to expand connectivity.

    Was there a need to amend the AERA Act?

    • The Airports Authority of India (AAI) awarded six airports — Lucknow, Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram and Guwahati — for operations, management and development in public-private partnership mode in February 2019.
    • In 2020 too, the AAI has approved leasing of another six airports — Bhubaneswar, Varanasi, Amritsar, Raipur, Indore and Tiruchi.
    • The Ministry of Civil Aviation plans to club each of these airports with nearby smaller airports for joint development.
    • The move follows FM’s Budget Speech this year, in which she said the government planned to monetize airports in tier-2 and tier-3 cities.

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  • RBI, IRDAI nod must for FDI in bank-led insurance

    Applications for foreign direct investment in an insurance company promoted by a private bank would be cleared by the RBI and IRDAI to ensure that the 74% limit of overseas investment is not breached.

    What does one mean by Insurance?

    • Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against losses from an insurance company.
    • The company pools clients’ risks to make payments more affordable for the insured.
    • Insurance is a capital-intensive business so has to maintain a solvency ratio. The solvency ratio is the excess of assets over liabilities.
    • Simply put, as an insurance company sells more policies and collects premiums from policyholders, it needs higher capital to ensure that it is able to meet future claims.
    • In addition, insurance is a long gestation business. It takes companies 7-10 years to break even and start becoming profitable.

    Types of Insurance

    Insurance sector of India

    • The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), mandates that insurers should maintain a solvency ratio of at least 150 percent.
    • The insurance industry of India has 57 insurance companies 24 are in the life insurance business, while 34 are non-life insurers.
    • Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
    • In addition to these, there is a sole national re-insurer, namely the General Insurance Corporation of India (GIC Re).
    • Other stakeholders in the Indian Insurance market include agents (individual and corporate), brokers, surveyors, and third-party administrators servicing health insurance claims.
    • In India, the overall market size of the insurance sector is expected to be $280 billion in 2020.

    Recent developments

    The chronological order of events:

    1. Nationalization of life (LIC Act 1956) and non-life sectors (GIC Act 1972)
    2. Constitution of the Insurance Regulatory and Development Authority of India (IRDAI) in 1999
    3. Opening up of the sector to both private and foreign players in 2000
    4. Increase in the foreign investment cap to 26% from 49% in 2015
    5. Increase in FDI limit from 49% to 74% in March 2020

    Issues with India’s insurance sector

    Insurance is considered a sensitive sector as it holds the long-term money of people. Various attempts were made in the past to open up the sector but without much success.

    • Lower insurance penetration due to various economic reasons such as poverty, etc.
    • Domination of the Public Sector ex. LIC
    • Trust issues in private insurances due to insolvency of private players
    • Saving habits of the public

    Significance of the recent amendment

    • The current amendment is an enabling amendment that gives companies access to foreign capital if they need it.
    • It is an important shift instance as the increase in the FDI cap means insurance companies can now be foreign-owned and -controlled as against the current situation wherein they are only Indian-owned and -controlled.
    • The move is expected to increase India’s insurance penetration or premiums as a percentage of GDP, which is currently only 3.76 percent, as against a global average of more than 7 percent.

    What does this mean for Indian insurance companies?

    • India has more than 60 insurance companies specializing in life insurance, non-life insurance, and health insurance.
    • The number of state-owned firms is only six and the remaining are in the private sector.
    • A higher FDI limit will help insurance companies access foreign capital to meet their growth requirements.

    How does this impact Indian promoters of insurance companies?

    • Most of the Indian promoters of insurance companies are either Indian business houses or financial institutions like banks.
    • Many entered into the insurance space when they were financially strong but are now struggling to cater to the constant need to infuse capital into their insurance joint ventures.
    • Over the years, the sector has seen large-scale consolidation and exits of many promoters.
    • A higher FDI cap will mean that more promoters could now completely exit or bring down their stakes in their insurance joint ventures.

    What higher does FDI mean for policyholders?

    • Higher FDI limits could see more global insurance firms and their best practices entering India.
    • This could mean higher competition and better pricing of insurance products.
    • Policyholders will get a wide choice, access to more innovative products, and a better customer service and claims settlement experience.

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    Back2Basics: Foreign Direct Investment

    • An FDI is an investment in the form of controlling ownership in a business in one country by an entity based in another country.
    • It is thus distinguished from a foreign portfolio investment by a notion of direct control.
    • FDI may be made either “inorganically” by buying a company in the target country or “organically” by expanding the operations of an existing business in that country.
    • Broadly, FDI includes “mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations, and intra company loans”.
    • In a narrow sense, it refers just to building a new facility, and lasting management interest.

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • There are two routes by which India gets FDI.

    1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

    2) Government route: Prior approval by the government is needed via this route. The application needs to be made through the Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of the FDI application under the Approval Route.

    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for Foreign Direct Investment.

  • What is RoDTEP Scheme?

    The Centre has notified the rates and norms for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme asserting that it would put ‘direct cash in the pockets of exporters’ soon.

    RoDTEP Scheme

    • RoDTEP is a scheme for Exporters to make Indian products cost-competitive and create a level playing field for them in the Global Market.
    • It has been kicked in from January 2021, replacing the earlier Merchandise and Services Export Incentive Schemes (MEIS and SEIS) that were in violation of WTO norms.
    • The new RoDTEP Scheme is a fully WTO compliant scheme.
    • It will reimburse all the taxes/duties/levies being charged at the Central/State/Local level which are not currently refunded under any of the existing schemes but are incurred at the manufacturing and distribution process.

    Answer this PYQ:

    Q.With reference to the international trade of India at present, which of the following statements is/are correct?

    1. India’s merchandise exports are less than its merchandise imports.
    2.  India’s imports of iron and steel, chemicals, fertilizers and machinery have decreased in recent years.
    3.  India’s exports of services ye more than its imports of services.
    4.  India suffers from an overall trade/current account deficit.

    Select the correct answer using the code given below:

    (a) 1 and 2 only

    (b) 2 and 4 only

    (c) 3 only

    (d) 1, 3 and 4 only

     

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    Why need such a scheme?

    • The scheme was announced last year as a replacement for the Merchandise Export from India Scheme (MEIS), which was not found not to be compliant with the rules of the World Trade Organisation.
    • Following a complaint by the US, a dispute settlement panel had ruled against India’s use of MEIS as it had found the duty credit scrips awarded under the scheme to be inconsistent with WTO norms.

    Coverage of the scheme

    • It covers about 75% of traded items and 65% of India’s exports.
    • To enable zero-rating of exports by ensuring domestic taxes are not exported, all taxes, including those levied by States and even Gram Panchayats, will be refunded under the scheme.
    • Steel, pharma, and chemicals have not been included under the scheme because their exports have done well without incentives.

    Back2Basics: Merchandise Exports from India Scheme (MEIS)

    • MEIS was launched with an objective to enhance the export of notified goods manufactured in a country.
    • This scheme came into effect on 1 April 2015 through the Foreign Trade Policy and was in existence till 2020.
    • It intended to incentivize exports of goods manufactured in India or produced in India.
    • The incentives were for goods widely exported from India, industries producing or manufacturing such goods with a view to making Indian exports competitive.
    • The MEIS covered almost 5000 goods notified for the purpose of the scheme.

  • Growth needs steps beyond reforms

    Why 1991 stands out as a watershed year in the economic history of India

    • This was the year in which the economy was faced with a severe balance of payments crisis.
    • In response, we launched a wide-ranging economic program to reform, restructure and modernize the economy.
    • The break with the past came in three important ways:
    • Dismantling of license and permit requirements: The vast network of licenses, controls, and permits that dominated the economic system was dismantled.
    • Redefining the role of the state: Changes were made by redesigning the role of the state and allowing the private sector a larger space to operate within,
    • Integration with world economy: The inward-looking foreign trade policy was abandoned and the Indian economy was integrated with the world economy and trade.

    Judging the performance of the economy after liberalisation

    • It is appropriate to look at three broad parameters to judge the performance of the economy after liberalisation — growth rate, current account deficit, and poverty reduction.

    1) Growth rate after 1991

    • Between 1992-93 and 2000-01, GDP at factor cost grew annually by 6.20%.
    • Between 2001-02 and 2010-11, it grew by 7.69% and the growth rate between 2011-12 and 2019-20, was 6.51%.
    • Best growth rate: The best performance was between 2005-06 and 2010-11 when showing clearly what the potential growth rate of India was.
    • This is despite the fact that this period included the global crisis year of 2008-09.

    2) Foreign reserves

    • BoP: The balance of payments situation had remained comfortable.
    • Most of the years showed a small deficit.
    • The exceptions were 2011-12 and 2012-13 when the current account deficit exceeded 4%. This was taken care of quickly.
    • Forex reserves: Foreign exchange reserves showed a substantial increase and touched $621 billion as of last week.
    • The opening up of the external sector, which included liberal trade policy, market-determined exchange rate, and a liberal flow of external resources, has greatly strengthened the external sector.

    3) Poverty ratio

    • Going the Tendulkar expert group methodology, the overall poverty ratio came down from 45.3% in 1993-94 to 37.2% in 2004-05 and further down to 21.9% in 2011-12.
    • The post-reform period up to 2011-12 did see a significant reduction in poverty ratio because of faster growth supplemented by appropriate poverty reduction programmes such as the Rural Employment Guarantee Scheme and the Extended Food Security Scheme.
    • With the decline in growth rate since then and with negative growth in 2020-21, this trend must have reversed, i.e. the poverty rate may have increased.

    Way forward

    • Growth requires more than reforms. Reforms are, in the words of economists, only a necessary condition. It is not sufficient.
    • Need to increase investment: It is the decline in investment rate of nearly five percentage points since 2010-11 that has led to the progressive decline of the growth rate.
    • Reforms supplemented by a careful nurturing of the investment climate are needed to spur growth again.
    • Reform agenda must continue: First of all, there is a need to move in the same direction in which we have been moving in the past three decades.
    • Policymakers should identify the sectors which need reforms in terms of creating a competitive environment and improving performance efficiency.
    • From this angle, we need to take a relook at the financial system, power sector, and governance. Centre and States must be joint partners in this effort.
    • Second, in terms of government performance, there should be an increased focus on social sectors such as health and education.

    Conclusion

    Growth and equity must go together. They must not be posed as opposing considerations. They are truly interdependent. It is only in an environment of high growth, equity can be pushed aggressively.

     

  • Vehicle Scrappage Policy, 2021

    The launch of India’s vehicle scrapping policy or the Voluntary Vehicle-Fleet Modernization Programme (VVMP) seeks to usher in a new age of what it means to own and use an automobile in India.

    Vehicle Scrappage Policy: Key Features

    • Fitness testing: The government plans to set up between 450-500 automated vehicle fitness testing stations across India on a PPP basis. Private vehicles – which are over 20 years old – will have to undergo fitness tests, at an estimated cost of Rs 300-400 per test.
    • Scrappage: A total of 60-70 vehicle scrapping centers will also be built, situated no further than 150-200 kilometers away from any location in India.
    • Green Tax: Vehicles that pass the automated tests will be subjected to a ‘green tax’, which will see owners shell out an additional 10 percent to 25 percent of road tax at the time of the renewal of the vehicle’s fitness certificate, along with re-registration fees.
    • Penalties: Those who choose to drive a vehicle that has failed the automated test will face substantial penalties, and such vehicles could also be impounded.
    • Choice of owners: The scrappage policy leaves the choice of scrapping to the owner of the vehicle, with Gadkari saying the automated tests will place emphasis on vehicle fitness, and not its age.

    Implementation plan

    • The implementation of the vehicle scrappage policy in India is still some time away.
    • Initially, it will be heavy commercial vehicles that will need to undergo fitness tests starting 1 April, 2023.
    • Fitness tests will be made mandatory for all other types of vehicles from 1 June, 2024, in a phased manner.

    Why need such policy?

    • Clean mobility: More than one crore vehicles on India’s roads contribute greatly to rising pollution levels, as well as their tendency to be less fuel-efficient towards the end of their life.
    • Reducing oil import: The promotion of clean mobility necessitates a reduction in the country’s fuel import bills, and a reduction in emissions is a pressing need at this time.
    • Road safety: Such vehicles are also inherently unsafe and can be a threat to their occupants as well as other road users.
    • Consumer benefits: Scrapping an old vehicle and replacing it with a new one will bring substantial monetary benefits for motorists, in addition to reducing emissions and enhancing fuel efficiency.

    Benefits for a vehicle owner

    • Once the vehicle has been scrapped, the owner will receive anywhere between four to six percent of their old vehicle’s ex-showroom price, and a scrappage certificate.
    • This will make the individual eligible for a road tax rebate of 25 percent, a registration fee waiver and a discount of five percent of a new vehicle’s ex-showroom cost, offered by the vehicle manufacturer.
    • This will essentially make a new vehicle cheaper for someone who has scrapped their old vehicle, with potential discounts in the range of Rs 30,000 (for a car costing Rs 6 lakh) to Rs 50,000 (for a car costing Rs 10 lakh).

    What are the other positives?

    • Investment and Employment: The policy will attract investment of over Rs 10,000 crore, and generate 50,000 jobs in the country.
    • Recycling: Proper recycling of raw materials obtained from the scrapping will help reduce the import of materials such as aluminium, copper, steel and more.
    • Vehicle price control: With the potential to recycle up to 99 percent of materials used in a vehicle, raw material costs are estimated to drop by as much as 40 percent.
    • Transition to EVs: There’s also a possibility to derive materials needed for local production of lithium-ion batteries from scrapping older vehicles, which could help drive the growth of the EV business.
    • Circular Economy: A circular economy depends on reuse, sharing, repair, refurbishment, remanufacturing and recycling of resources to create a closed-loop system, minimizing the use of resources, generation of waste, pollution and carbon emissions.
    • Demand boost: Globally, a scrappage policy has been followed by a boost in demand in the auto manufacturing sector, especially in Europe and the US.

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