Budget 2005-06: new trade policy paradigms clearly emerging for SMEs

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: For a change, the Budget presented for 2005-06 did not have any attractive announcement for small and medium enterprises (SMEs) — the mention of SME Growth Fund and increase of overall investment limit from Rs 3 crore to Rs 4 crore are, at best, inconsequential. Instead, withdrawal of the excise exemption option with Cenvat would upset a large segment of SSIs. However, the Budget underlines the new paradigms emerging in India’s trade policy having implications for the SME sector.

These paradigms broadly have two dimensions. One, the reforms being taken up by India unilaterally and, two, navigating trade policy in light of present international commitments, or ones that are on the horizon. The Budget proposes to reduce the peak rate of customs duties from 20% to 15%. It also proposes reduction of the input cost of a large number of SMEs, by reducing customs on primary and secondary metals from 15% to 10%. Thus, the commitment of successive governments to achieve alignment of duty levels with Asean seems to be staying on course, though the convergence between the two at 0-5% levels are only likely to happen around 2008-09.

The reduction prepares the industry for the challenge emanating from free trade agreements, especially Indo-Thai and Indo-Asean. However, even now India’s duty levels are still among the highest in the world. The good thing is that the difference of average customs duties between China and India has got compressed considerably, around an average industrial tariff at 10%, and would narrow the competitive advantage of China over India. Further, the Budget proposes removal of duty on specified capital goods and all inputs required for the manufacture of Information Technology Agreement (ITA)-bound items, while a countervailing duty (CVD)) of only 4% is to be levied on the imports of ITA-bound items and their inputs that attract nil duty.