​Moneycontrol Pro Panorama | Cash for clunkers, but not from my pocket

Dear Reader,

Auto stocks are wearing long faces on Friday, a day after the government announced it had finalized the auto scrappage policy. Although there could be other reasons for the dip, the resurgence of COVID-19 cases for example, there is certainly no excitement around what is known about the scrappage policy.

India’s auto companies have been pining for a scrappage policy ever since the US government’s cash-for-clunkers policy made headlines. The programme followed the US pandemic with the objective of stimulating demand. But just as the US government can afford to give out $1400 cheques to those who need it, it could also afford to give vouchers of up to $4500 a vehicle with some conditions attached.

In India, the central government’s policy indicates no such support is forthcoming from it. Instead, it has cobbled together a set of disincentives, such as higher re-registration charges for older vehicles and clearing fitness tests, to push people to scrap their vehicles.

While the central government may waive registration charges on the new vehicle, that’s a paltry sum and on the more substantial road tax to be paid, it wants state governments to offer discounts of up to 25percent on cars and 15percent on commercial vehicles. Which state government would want to give away revenue just like that?

A customer trading in an old vehicle is expected to get 4-6percent of the ex-showroom price of a new vehicle as scrap value. How this range has been arrived at is not clear. What’s more, the government wants auto companies to give a 5percent incentive on a new vehicle under the policy. The logic would be you are getting more sales so why don’t you pay for it.

A more substantial scheme would have been one in which the government recognized that the scheme will see incremental sales of new cars replacing end-of-life cars. This in turn will mean it gets GST revenue it would have otherwise not got and it should have thus offered a slice of that as an incentive back to the customer, to encourage them to trade in. And then auto companies would have been happier to part with a bit more.

The scheme could have been misused--buying a very old car and trading it in to get the incentive, for instance—but then in its current form, it’s not terribly exciting either. Maybe, the government wants to see how the initial response is, and once the system stabilizes--it needs fitness and scrapping centres to be operational--it may feel more confident of offering a rebate from its own pocket without suffering a loss to tax revenue.

While the auto sector may be wearing a glum look, software stocks are cheerier today, as Accenture’s results showed a brighter than expected performance. Its deal flow and outlook lend confidence that it can sustain its performance. What should Indian investors be pencilling in when they evaluate Indian IT stocks, in light of Accenture’s results? Read our take in: Accenture’s stellar show: How should investors in Indian IT read this? And after that, here’s our take on mid-cap IT stocks:Mid-cap IT catches up on revenue recovery, profit margins key.

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Technical picks: Amararaja Batteries, Bank Nifty, Jindal Steel and Adani Transmission (These are published every trading day before markets open and can be read on the app)

Cheers,

Ravi Ananthanarayanan