Keeping hope afloat

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: India has come a long way since liberalisation in 1991. After initial hiccups, various sectors of industry have successfully taken up the subsequent competitive challenges via the restructuring of operations, rationalisation of resources, improved product mix, efficient supply chain management and enhanced efficiencies. Today, a large number of Indian companies are looking at global markets with increased confidence.

Currently, amidst murmurs of an economic slowdown, a debate is on among economic and industrial circles about how to meet emerging challenges and ensure that India’s growth story does not lose any of its lustre. The Index of Industrial Production estimates released by the Central Statistical Organisation point to disturbing trends. Industrial growth slid to 5.3% in January 2008, against 11.6% in January 2007. While curbing inflation may be the government’s current focus, the industrial slowdown needs to be tackled on an urgent basis, too.

While Indian external trade reforms are well on course, internal reforms have somehow lagged behind. While import duties have been brought down, much needs to be done to enhance the competitiveness of industry. Changes in the policy framework could achieve greater competitiveness, I believe, and this is the time to carry these out. Here, I present automotive tyres as a case study, and discuss how the tyre industry has emerged globally competitive—but with its global ambitions thwarted by the policy regime.

A glance at Indian roads will confirm the revolution that automobiles in India have undergone over the past 15 years. The Indian tyre industry, with as many as 43 tyre companies and 58 manufacturing plants, has kept pace with the scenario. India is among the few countries to have attained near self-sufficiency in domestic tyre manufacturing capability. All categories are made locally, from 1.5-kg moped tyres to 1.5-tonne earthmover tyres, and from rugged steel radial truck tyres to high-performance car radial and tubeless tyres. Indian tyre-makers have invested in R&D and product innovation, and have done well as OEM suppliers to the world’s top auto firms. Indian tyre exports are expanding, too, and even to quality-conscious markets such as the US and EU.

However, all is not well with the tyre industry. Of late, threats to the industry’s competitive edge has arisen from the rising cost of power, rising interest rates and constraints on the supply of raw material. The industry is raw material-intensive, using natural rubber, nylon tyre cord fabric, carbon black, synthetic rubbers and rubber chemicals. Natural rubber, which alone accounts for 42% of raw material costs, is seeing consumption outpace production in the country, as the latter slackens.

Market conditions are tight for this commodity. Domestic natural rubber prices have spiralled from an average of Rs 70 per kg in 2005-06 to Rs 105 per kg now. With the tyre industry’s annual consumption being 4.6 lakh tonnes, every Re 1 extra means a burden of Rs 46 crore. But even availability is a problem now. Yet, customs duty on the import of this raw material, at 20%, is double that on the finished product (10%). This distorts the tyre industry’s cost structure and is out of whack with accepted principles of tariffs, which should be lowest in basic raw materials, higher on intermediates and highest on finished goods.

To make matters worse, natural rubber exports are being encouraged. A pertinent question that needs to be debated is whether we should be exporting our natural produce in the form of raw material or value added finished goods. The export of value-added rubber products currently stands at

Rs 5,500 crore per annum, and is growing. Under these circumstances, is it prudent to allow the export of natural rubber (in its primary form) at all?

On the other hand, the import of finished products such as vehicle tyres—given the low import duties on these—is on the increase. According to DGCI&S, government of India, while the import of truck and bus tyres was up by 73%, that of passenger car tyres was up by 116% in 2006-07. Industry estimates point to further increases in the import of truck and bus as well as passenger car tyres in 2007-08.

Time is ticking away on the industrial clock. There is urgent need for a broadbased facilitative policy regime aimed at increasing the competitiveness of various sectors of Indian industry and providing them an equitable market environment vis-à-vis their international counterparts. Emergence as global players requires constant investments in process and product innovation. A conducive policy environment, aimed at rectifying policy inconsistencies, could go a long way in reversing the industrial slowdown currently being experienced in several sectors. It would keep hope afloat, and signal to Indian industry that the efforts are not at cross-purposes, but aimed jointly at a strong comeback.