Duty hike: Hitting consumers to benefit industry

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Updated: February 10, 2020 5:21:09 AM

Raising import duties hits consumers & also makes India more uncompetitive; yet, govt also wants to push exports

Duty hike, import duties, EPFO, EPFO, Economic Survey, FTA imports, PMP, Chinese prices, SamsungThe government must know you can’t have import protection when you want and still expect other countries to fully open their markets to you.

If the plastic cricket bat you bought for your one-year-old nephew for Rs 120 last week costs Rs 160 now, blame it on the trebling of import duties, from 20% to 60%, on various toys in the budget. If you leave out walnuts, of the shelled variety, where the duty was hiked from 30% to 100%, no import duty has been hiked more, though more powers have been given to the government to apply safeguard duties, and tariff-rate quotas “to curb the increased quantity of imports of an article to prevent serious injury to domestic industry”; in which case, duties could rise even more.

Given how badly some parts of industry have been hit by imports of Chinese toys, at one level, you can’t blame the government for trying to protect producers. But, there’s a caveat here. If Indian manufacturers are to be able to compete with the Chinese, this means the plastic they buy has to cost the same as what China’s manufacturers pay, as does the electricity, the rentals, wages, other government imposts—say, EPFO and ESI for any reasonable sized toy producer—and other costs like transportation etc. We can get into each item, but it is clear India’s costs are at least 60% higher than those of the Chinese.

So, while trebling the duty protection is fine, the question is whether the government has put in place a plan to reduce all these cost differences; and, how much time it is giving this protection for. If this is not specified, even a manufacturer who saves on costs due to, say, an increase in scale of operations, will keep prices up thanks to the import protection. The same applies to phones, to auto parts, fans, heaters, irons, ovens …

It is not as if the government doesn’t have the expertise to figure this out. To cite the latest example, the Economic Survey talks of how, despite the fear about FTAs having led to increased imports and not exports, India’s exports grew by 10.9% per year to these countries while imports grew 8.6%. Yet, the Budget talked of how FTA imports were on the rise, posed a threat to domestic industry, and the need to review the ‘rules of origin.’

Indeed, the Survey also shows India doesn’t have as much of an imports problem as it does an exports one (see graphic). In the case of imports, too, were the local exploration policies for oil and other minerals (bit.ly/379MOz8)—as well as the gold bond scheme (bit.ly/2v8XPDJ) —to be more attractive, imports would also reduce. Indeed, the issue that should concern the Budget is whether, after the duty hikes, local manufacturers can hike output. In the case of oil, the binding constraint are policies that remain quite unfriendly. Similarly, in the case of toys, if Chinese products cost half of what Indian ones do, even the 60% protection won’t help, making it just a deadweight imposition on Indian consumers, with no attendant benefit like increased production and jobs. In the 1970s and 1980s, India cocooned its textiles industry by imposing high tariffs; the gap between Indian and Chinese prices was so great that, despite the high tariffs, India was flooded with Chinese imports. In a globalised world, if you’re not globally competitive, you can’t be even locally competitive.

The government must know you can’t have import protection when you want and still expect other countries to fully open their markets to you. When the world was more genteel, developed countries would give full access to poor countries; this changed dramatically with Donald Trump and, in any case, India is hardly poor anymore. That is why, while the commerce minister made light of India’s decision to walk out of RCEP by saying we would sign FTAs with the US and Europe, there has been little progress on this. Sure, the US may not want India to cut duties on toys, but it wants those on motorcycles, almonds, and chicken legs to be lowered, and it wants India to considerably ease its process of granting patents etc.

Understandably, India will baulk at giving in to US demands, but if India is not even going to be a part of FTAs like RCEP, who will India trade with? And, if India is going to hike its tariffs instead of lowering them the way most others are—and by a lot more in the case of the FTAs—how can it expect others to allow its exports with low tariffs?

One exception to this rule, many feel, is the Phased Manufacturing Programme (PMP) that India has for mobile phones, for instance. As part of PMP, duties are hiked for intermediate products—say, a battery—to encourage local production, and the plan is that, over time, there is more local value addition; the Budget has hiked duties on display panels, PCBA and vibrator/ringers by 10 percentage points. While India’s production of mobile phones rose from 6 crore units in FY15 to 22.5 crore units in FY18, imports rose quite fast as well, from $11.2 bn to $21.9 bn, suggesting that local value addition remains limited.

If, as a result of the Budget proposal, even if Samsung was to produce more display panels here, these will be at least 10% costlier than those available overseas. So, anyone buying display panels from Samsung to export mobile phones will suffer a cost disadvantage. Or take a hike in steel import duties. If an exporter of automobiles imports steel, it will get a refund for the import duty; but, if local prices of steel rise as a result of the import duty and the exporter buys local steel, it doesn’t get compensated for the hike in local prices. In other words, PMPs work best for import substitution, not for exports.

The Budget does have a plan to boost exports of electronics items through an incentive scheme—details to be announced later—since this has large potential; Apple and Samsung account for 60% of the $500 bn global market for mobile phones. While India’s exports are $2.7 bn right now, the 2025 target is $110 bn! Since producing phones in India is about 9-12% costlier than it is in Vietnam, presumably, companies will have to be given a large incentive, though the access to the Indian market will also be an attraction. Whether the scheme works or not remains to be seen, but it is clear India’s import substitution schemes don’t sit well with its export-promotion goals.

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