Customs officials have long suspected that China may be diverting its supplies to India via Asean nations, abusing rules of origin.
Amid India’s border clash with China, customs officials are set to further step up the scrutiny of the place of the origin of imported products to prevent unscrupulous elements from illegally taking advantage of the country’s free trade agreement (FTA) with any partner.
Customs officials have long suspected that China may be diverting its supplies to India via Asean nations, abusing rules of origin. Given the latest skirmish and the frosty political ties, the diversion may surge, they fear. So inflows from certain Asean members, especially Singapore and Vietnam, may see a closer scrutiny now.
Of course, given the Covid-19 outbreak, it will be a tough job but the intent is very much there, a senior customs official told FE. India has an FTA with Asean members and a separate one with Singapore as well.
Already, an unusual 118% spurt in India’s merchandise imports from Singapore to a record $16.3 billion in FY19 had alarmed customs officials. The surge coincided with the peak of a trade war between Beijing and Washington. “The diversion basically serves two purposes: the essentially Chinese products enjoy duty-free access and it also doesn’t reflect in China’s overall massive trade surplus with India. We have been monitoring any potential violation of the rules of origin of imported products. But now, the scrutiny has to be even tighter,” said the customs official.
Tighter scrutiny will also benefit genuine suppliers from Asean members, as they won’t have to face unscrupolous competitors, he added. There is a greater chance that China will divert supplies through Asean members like Singapore and Vietnam, where its companies have invested heavily, he said.
In fact, the 118% spike in imports from Singapore in FY19 was unheard of despite the existence of the FTA for 15 years now. At 64%, the highest annual surge in imports from Singapore in recent memory was witnessed in FY07, a year after the FTA — formally called the Comprehensive Economic Co-operation Agreement — was signed on June 29, 2005.
Consequently, India’s trade balance with Singapore exacerbated dramatically, from a surplus of $2.7 billion in FY18 to a deficit of $4.7 billion last fiscal, showed the DGCIS data. It also helped drive up India’s trade deficit with all Asean members substantially to $21.8 billion in 2018-19 from just $12.9 billion a year before.
Although the imports from Singapore dropped 6.9% year-on-year in the April-February period of FY20 to $13.8 billion, they were still more than a double of what India imported from the city-state in the same period in FY18 and way above the usual trend in the earlier years. Interestingly, in addition to Singapore, India’s trade balance with Hong Kong — widely considered a proxy for Beijing — went haywire in FY19 and turned negative for the first time in at least two decades even as its trade deficit with China eased by $9.5 billion to $53.6 billion. This had raised questions about the actual reduction in India’s effective trade deficit with China.
In November 2019, India pulled out of the China-backed Regional Comprehensive Economic Partnership (RCEP) deal, as it feared, among other things, massive dumping by China and some others. So it wanted effective safeguard mechanisms and strict rules of origin to protect its industry but couldn’t get others to agree to. In fact, New Delhi was pushing for “sufficient value addition” of at least 35% in the country of exports for a product to be eligible for its tariff concession under RCEP pact, while others wanted to settle for just minimal value addition.
Sources had earlier told FE that what had reinforced suspicion of a potential diversion of some Chinese supplies was the fact that, among the high-value segments, the maximum jump in imports from Singapore in FY19 was noticed in electrical machinery and parts, sound recorders and TV images etc (158% rise year-on-year to $3.1 billion), followed by a 142% surge in certain capital goods (nuclear reactors, boilers, machinery and mechanical appliances and parts) to $2.7 billion. China is the dominant exporter of most of these products.
Although such goods used to be imported from Singapore earlier as well, what raised eyebrows was the unusual spike in such inflows in one year (FY19), when there was an escalating trade war between China and the US.