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Thursday, 08 February 2018 04:42
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Keeping import duties low forces India Inc to become more competitive, raising duties does the opposite

In the case of sugar doubling import duties means that issues like raising efficiency levels or moving to the Rangarajan formula can be avoided

In the past, during the infamous Bombay Club days, raising import duties were seen as the preferred alternative to protect local industry. The solution was, however, rejected for the most part and the result was that, over the years, a fairly competitive industry emerged. In the bargain, India became a fairly open economy with imports and exports equalling over 40% of GDP and with basic customs tariffs as low as 2-3% on average, according to a recent Brookings India study. If, on the other hand, India had hiked import duties—which is what Bombay Club industrialists wanted in the early 1990s—this would never have happened and industry would have continued to remain inefficient, constantly looking for protection.

Despite this happy experience with lowered tariffs, the government raised import duties across a range of products last week. The justification given by some is that this is an attempt to stop China from dumping products in India, and some have argued this is an attempt to ensure that firms like Apple actually start producing their phones in India instead of continuing to import them. If a higher import duty on phones raises their price, at some point firms like Apple may decide they want to produce them locally. Both arguments would have been compelling if they were correct. If dumping by China was really the problem, the solution would lie in levying anti-dumping duties. As for Apple and others that are importing phones, as this newspaper has shown (goo.gl/mhd1vT), even though so-called indigenisation of phones has increased dramatically—a mere 19% of phones were made locally in 2014 and this is up to over 74% today—the import bill has risen from $8.8 billion to $12.6 billion over the same period. The reason for this is simple: while several phone manufacturers now have assembly lines in India to avoid the duty on finished phones, they continue to import the SKD kits from China.

If the government was serious about local value addition, it would have, in the case of mobile phones, stuck to its phased manufacturing plan (PMP) and continued to levy import duties on components instead of on the final product. While PMP seems to have been abandoned, for now, for mobile phones, if the idea was to help value addition for other electronic items on which import duties have been raised, a PMP would have been put in place for them as well. Instead, the companies have been given an indefinite protection, with no end date for this. Indeed, if the duties had been imposed for a pre-defined period of, say, two years, companies would know they had two years in which to get more competitive. Similarly, in the case of sugar, for which the import duty has just been raised to a whopping 100%, there is no real rationale, except perhaps the ability to now tell farmers that the government cares for them. In this case, thanks to subsidies from Pakistan, its sugar is now quite competitive and can be imported at either Mumbai or Wagah at around $340-350 per tonne. With the 50% import duty that was prevalent till recently, this translates to a price of around `34 per kg which is slightly lower than the Indian price. Trying to protect local industry from unfair Pakistani subsidies is fine, but it did not need the duty to be doubled. By imposing an import duty that is much higher than what is required, the government has set the stage for an escalation in local sugar prices.

There is, though, a deeper logic for hiking the duties, and that is they obviate the need for India, or Indian firms, to get its house in order. In the case of sugar, it is obvious that the problem lies in the high prices that mills are forced to pay sugarcane farmers in states like Uttar Pradesh. States like Maharashtra have less of a problem because they have already moved to the revenue-sharing formula recommended by former RBI Governor C Rangarajan during the UPA period. With a huge cushion for local industry, the government is now under no compulsion to fix cane pricing in Uttar Pradesh, and it can legitimately lean on industry to clear farmer dues because it has ensured a hefty profit margin for it. Which industry, the question to ask the government, has ever become competitive on the back on import protection? Indeed, in the case of farm items where the MSP is to be raised—the impact is the same as far as protection is concerned—by 18% in the case of cotton and 11% in the case of paddy, apart from raising prices for users, this will end up making large parts of the farm sector uncompetitive as far as exports are concerned.

In the case of sugar, to continue with the example, mills in Uttar Pradesh were making huge losses due to the policy of high cane prices some years ago. While continuing to petition the government to lower prices, mills in the state began working on improving the yield of the crop—after all, if the same crop yielded a higher amount of sugarcane, the effective price would be lower; this worked, and the losses of sugarcane mills in Uttar Pradesh fell as a result. When there is a huge import price cushion, as there is now, however, there is no reason to try to become more efficient by compressing costs. In the case of steel, a series of import duty/anti-dumping duties have been in place since early 2016 even though global prices have risen by 60-70% since then. While this has helped the industry, as the Engineering Exports Promotion Council (EEPC) has put it, this has cut into the export competitiveness of user industries—according to EEPC, as compared to the average export price of $497 per tonne, domestic prices of hot rolled coils are around $700 per tonne. Putting import duties on consumption products as has just been done, it is true, does not lower the competitiveness of local industries, but it does raise prices for consumers.

 

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