A better duty structure needed

By: | Published: September 14, 2018 3:18 AM

The basic customs duty on primary aluminium metal is 7.5%. On the other hand, customs duty on aluminium scrap—a substitute product—is just 2.5%. This has enabled scrap imports to increase by 138% in the last seven years

GDP, metal industry, make in india, Minimum Import Price,  steel industry, India-South Korea CEPA, global exports of steel productsThe surge in imports at predatory prices finally prompted the Indian government to implement a series of remedial measures to support the ailing steel industry.

R Gopalan

India’s natural and human resource endowments make manufacturing a key component for achieving high rates of growth that can pull out millions of people from poverty. In order to achieve this, the Union government targets to raise the share of manufacturing in GDP to 25% and creation of 100 million new jobs by 2022.

However, for the past six years, the share of manufacturing in India’s GDP has remained in the range of 15.9% to 16.6% despite the aggressive Make in India push. A key problem is India’s non-ferrous base metal industry, mainly comprising aluminium, copper, zinc, lead, nickel and tin, is not able to unlock its full potential due to unfavourable tariff structures—especially, the high import duty on raw material. This makes production uncompetitive even as low import duty on finished products and scrap is flooding the market.

The steel industry, in contrast, has duty structures that are favourable for growth. The import duty on raw material—iron ore and coal—is kept low, while that on finished steel products is kept reasonably high to safeguard the industry from imports. Steel industry is also supported with other trade remedies like anti-dumping duty, safeguard duty, Minimum Import Price (MIP), etc, to ward off cheap imports.

In the aluminium sector, the basic customs duty on primary aluminium metal is 7.5%. On the other hand, customs duty on aluminium scrap—a substitute product—is just 2.5%. This has enabled scrap imports to increase by 138% in the last seven years, from 470 kilo tonnes (kt) in FY11 to around 1,100 kt in FY18.

Copper manufacturing in the country, on the other hand, faces the challenge of an inverted duty structure. Due to this unfortunate situation, there has been a huge surge in imports, of 2.2 million tonnes (mt) of refined copper during FY18—equal to a third of the total domestic market. India has a total capacity of 10 mt per annum of refined copper; however, due to this surge in imports, the industry is operating only at 80% of its capacity.

Similarly, for zinc, import duty was put under progressive reduction and was made nil, i.e., zero, in 2014, following the ratification of India-South Korea CEPA. As a result, zinc imports into India from South Korea increased substantially, from 10,000 tonnes in FY10 to 126,000 tonnes in FY18—a >1,100% increase. Despite India having excess capacity of ~100 kt for zinc products, it imported 185 kt zinc in FY18, 70% of this from Korea.

In comparison, a look at the steel industry shows that the government has been supporting this debt-burdened industry through various trade remedies.

During FY05-FY14, imports of steel products into India stayed in the range of 2.3 mt to 7.9 mt and averaged around 6 mt. This suddenly shot up to 9.3 mt in FY15 and reached a whopping 11.7 mt in FY16. Though global steel prices plummeted and China’s global exports of steel products touched 110 mt in 2015 for the first time, the majority of imports into India were coming from South Korea and Japan.

The surge in imports at predatory prices finally prompted the Indian government to implement a series of remedial measures to support the ailing steel industry.

As the measures were inadequate and imports kept rising, the Union government imposed the MIP condition on 173 steel products in February 16. These measures led to steel imports coming down to 7.2 mt in FY17, from 11.7 Mm the previous year, and this was contained at 7.5 mt in FY18. The domestic steel companies also got back on the path to profitability due to the government’s support via trade remedies on both raw material and finished products.

The disparity in duty structures within the metal industry is clear: for steel, the difference in duties between raw material or scrap, and the final products is high, to the extent of 7.5% to 10%. For other non-ferrous base metals, like aluminium and copper, the difference is just 0% to 2.5%.

Currently, the Indian steel industry is reeling under the burden of large NPAs. Had the government acted supportively in the initial years of rising imports in terms of raising import duties, etc, this situation might have been avoided. Steel production is seen as symbolic of national industrial strength, and the industry is viewed as an important source of large scale employment. Hence, the steel sector is regarded as strategic and requiring support.

Aluminium is an equally strategic metal today, widely used in defence and other industrial applications. Similarly, copper is of utmost importance for electrical equipment, general engineering, transportation, construction, etc. Galvanising steel products is impossible without zinc. The success of the government’s ambitious plans for Housing for All, Power for All, Smart Cities etc. will depend much on strong domestic supply base of these essential non-ferrous base metals.

India’s overall non-ferrous base metal industry, which is also struggling due to the influx of imports of finished products as well scrap, should also be treated under the same principle as steel products.The primary non-ferrous base metal sector may be profitable today. But, the situation may soon become drastically different if the menace of imports and duty structure is not handled skilfully. The government must act prudently and promptly to save this industry and avoid another steel-like fiasco. India’s manufacturing growth will also depend on the timing and extent of such actions.

Former secretary, department of economic affairs, and department of financial services, ministry of finance

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