Duty hikes won’t result in an Atmanirbhar India – need for a genuine easing of doing business rules

By: |
Published: July 15, 2020 5:40 AM

Over the last three decades, India’s exports grew just 18-fold versus 40 times for China, a whopping 110 times for Vietnam, seven times for Indonesia, and 23 times for Bangladesh, etc.

Indeed, a problem with import duty hikes is their impact on making the economy less competitive as costs of imported components rise, and the fact is that the protection ensures industry doesn’t try as hard to cut costs. Indeed, a problem with import duty hikes is their impact on making the economy less competitive as costs of imported components rise, and the fact is that the protection ensures industry doesn’t try as hard to cut costs. (Representative image)

Commerce minister Piyush Goyal did well to, in his address to the Bombay Chamber of Commerce & Industry, stress upon a point made by prime minister Narendra Modi that Atmanirbhar Bharat was not about shutting off from the rest of world, but was about engaging more, about India becoming part of global supply-chains, etc. The ground reality, though, appears a bit different. The duty hikes expected on lithium-ion batteries are part of an earlier plan to encourage domestic production of electric vehicles—Mint reports further tweaking of this plan—but there has been a fairly steep hike in average import duties for all products since the Modi government first came to power in 2014. Between then and last year, import tariffs are up from 13.5%, to an average of 17.6%—that is a hike of over 30%; an even greater hike, of 47%, can be seen between 2014 and 2018 in terms of trade-weighted tariffs, that is hikes based on the amount of imports of various items.

While the plan to hike import duties across the board, or on items like parts of electric vehicles, including batteries, sounds like a great way to encourage indigenisation, it is worth keeping in mind that import-substitution in place of export-promotion—that countries like China practised—is a 70-year old strategy in India, and it has been a strategy that has spectacularly failed. Over the last three decades, India’s exports grew just 18-fold versus 40 times for China, a whopping 110 times for Vietnam, seven times for Indonesia, and 23 times for Bangladesh, etc. Combine this with the rise in imports, and India’s trade deficit rose from 1.7% of GDP to 5.5%, while China grew its surplus from 2.4% to 2.9% and, Vietnam turned a deficit of 4.6% into a surplus of 4%. Vietnam’s exports were just 3.8% of India’s three decades ago while they are 81.5% today.

Indeed, a problem with import duty hikes is their impact on making the economy less competitive as costs of imported components rise, and the fact is that the protection ensures industry doesn’t try as hard to cut costs. And, since local demand has to be met, as we saw in the case of mobile phones where a similar import-duty-increase strategy was followed since 2014, imports have continued to rise. As the government has just done for mobile phones, a better strategy to encourage local production—and, hence, even exports—is to have production-linked incentives; indeed, this is also the policy India plans to put in place to encourage the Active Pharmaceuticals Industry (API) industry to migrate back from China. In the case of lithium-ion batteries, in addition, since little real progress can be made without a lot of R&D, capital subsidies and generous R&D-linked grants/subsidies will probably be a better idea; just one technology transfer agreement has been signed Li-ion batteries so far, between a CSIR-arm and RAASI Solar.

More important, if the government truly wants Indian exports to pick up—and imports growth to slow—the only way to achieve this is to genuinely simplify the ease of doing business, and not to tout the rise in the World Bank Ease of Doing Business rankings that are easily gamed. It is only when local firms—or foreign firms that manufacture out of India—have scaled up production that they can hope to be truly competitive; an HSBC study had pointed out, some years ago, that domestic bottlenecks could explain half the recent slowdown in India’s exports. It is only when this is done that India can be, to go back to what the commerce minister has said, truly Atmanirbhar and an important part of the global supply chain.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Pandemic pain of emerging markets
2Stimulating the economy: Is direct financing by RBI an option?
3Why RBI rate-cut may not happen before December 2020