April 13, 1998

The Government is under pressure to review the tariff structure from an industry hit by drastic cuts.

By Shefali Rekhi

In the competitive regime of global trade, most countries are eager to protect their turf. But India is an island of selflessness, specially when it comes to customs duties. The flattening bottom lines and factories running below capacity are a testimony to a country that perhaps went a bit too far on the issue of lowering tariff barriers. Former finance ministers Manmohan Singh and P. Chidambaram were eager to push India on the path of globalisation and to catch up with the then economically vibrant South-east Asian countries, now under a currency collapse. Internal trade reforms, however, were not pushed before tariff barriers were substantially lowered much beyond India's commitment to the World Trade Organisation (WTO). Consequently, it has left the industry exposed to unsustainable competition from cheap imports. Some examples:

• Imports in dollar terms for the period April to December last year registered a growth rate of 7.7 per cent, up from 4.1 per cent during the corresponding period the previous year. This happened even though industry had slowed down and imports had become more expensive with the rupee losing its value against the dollar. An indication that imports were landing not because of higher demand. The sectors that witnessed substantial increase in imports were: inorganic and organic chemicals, electrical machinery, iron and steel, primary steel, pig iron-based items and medicinal and pharmaceutical products. And it is the manufacturers in these sectors who are today complaining of being adversely affected.
• Arvind Pande, chairman-cum-managing director (CMD) of the public-sector Steel Authority of India Limited (SAIL), says Chidambaram's move to reduce the import duty on hot-rolled steel coils from 30 per cent to 25 per cent "will affect my bottom line this year". Though imports were not high in terms of quantum, goods were being "dumped" in India at prices less by Rs 1,000 a tonne. sail had to slash its selling prices by an equal amount. Pande has put off, by at least a year, plans to construct a mill in Durgapur to make downstream products and modernise the cold-rolled steel mills of Bokaro and Rourkela.
• Larsen & Toubro, the construction giant, was expecting Rs 2,000 crore worth of orders for supplies to refineries. But with the zero-duty provision on imports for infrastructure and related sectors, the orders passed them by. It was the same with Bharat Heavy Electricals Ltd (BHEL), which saw a business loss of 20 per cent. Says CMD R.K.D. Shah: "We have been crying hoarse but no one's listening."

The sharp cut in import duties affected bottom lines, forced a postponement of investment and aggravated a slowdown that was already underway. In some instances, the skewed approach to lowering tariffs is bound to have a long-term bearing. In the case of bulk drugs, the base for medicinal formulations, fresh investments dried up as sharp duty cuts began three years ago. The share of imports in bulk drugs increased from 28 per cent-30 per cent then to about 40 per cent. "What went wrong is that globalisation preceded internal liberalisation," says Dilip G. Shah, chief executive of the Vision Consulting Group, which specialises in public policy and strategic planning. "So domestic manufacturers are getting hit and there is no real incentive to invest."

Correcting the anomalies will pose a tough challenge for the new Government. It has promised a review for now. Finance Minister Yashwant Sinha told India Today last week: "I will address these issues in my regular budget." Pre-budget industrial lobbying has begun to ensure there will be changes in the tariff structure. There are many tricky issues for the Government to handle.

Under the WTO agreement, India has time till March 2000 to reduce its duties (as they existed in 1990-91) to a third. But it has already gone substantially beyond in many product categories. Of the 5,000-odd items, 4,300 are industrial. Existing tariffs on most of these items are substantially lower than even the final committed rate. But is raising revenue really an alternative?

Further, local manufacturers have to pay sales tax as well as octroi which inflate costs and erode India's competitiveness by 5 per cent-14 per cent. Importers do not pay any such tax. In many cases, duties on inputs are much higher than on the finished products. Consequently, it makes sense to import finished products rather than to manufacture them locally. And that compounds the input producer's suffering. For instance, textile machinery and intermediates attract 20 per cent basic duty while raw materials such as some steel tools carry 30 per cent duty.

With free-falling import duties, India has also became one of the favourite grounds for dumping. In 1994, only two items were being dumped: PVC resin, a rubber substitute, and bisphenol A, an organic chemical. Today, the number of items has gone up to nine. They include newsprint, PTA and graphite electrodes (used in the steel industry). Commerce Minister Ramakrishna Hegde will have to strengthen the anti-dumping policy.

The BJP's dexterity will be put to the test in its handling of such sensitive issues, without giving the signal of turning protectionist. That calls for a deft tightrope walk on policy. If India should go global -- which it must -- the approach road should be first paved with an internal liberalisation of the trading system. Europe reformed its markets and currencies internally before it sought to build a common market. India too cannot afford to have a regime of borderless trade dropped on it overnight.

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