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GST is not ‘Make in India’ friendly. The IGST rates for imported material are not substantially higher than the core essential manufacturing inputs. This is a major policy aberration that needs to be corrected now that a unified tax regime provides this opportunity.
The unified tax regime like GST is an excellent mechanism to rationalize and phase out non- essential imports to the country. However, that can happen only if there is a focused thought behind improving the manufacturing sector in the country that nations like China have. China continuously tweaks its import policy with large nations to ensure that the trade balance is heavily in their favor.
A look at India’s widening trade gap with China is revealing
Over the last five years India’s export to China have shrunk to $9.05 billion. This despite the fact that the Rupee has depreciated by nearly 30% during the period. Indian Express spoke to several exporters and manufacturers on the subject. Rohit Singh a SME producer used to export Indian handloom dresses and traditional bead work accessories to China a few years ago. Singh says “It is impossible to export today because China itself manufactures these items for the US market. They have developed low cost sophisticated machines to improve productivity. Last year I too imported two such machines and that helps me to lower my cost” says the exporter.
“Our Government does not realize that Indian look ethnic dresses are being exported by Chinese companies globally.” says Singh. Several other exporters have this grouse. We do not have a ‘Make in India Tariff’ policy. “The tax regime created by the bureaucracy normally caters to the demands of the influential lobbies. A few years ago, during the UPA rule imported olive oil got a sudden boost when duties were drastically reduced. The market was soon flooded with imported olive oil “says Kishan Lal an oil mill owner and suddenly the demand for Indian sun flower oil dropped”.
Last year the trade deficit with China grew to $52.65 billion. Five years ago, the figure was $38.67 billion and when the Modi Government came to power in 2014-15 it was $48.45 billion. So clearly not much has been done to reverse the trend of widening trade deficits with China, in the last five years.
Financing of Chinese imports is the key
Several core manufacturing sectors of telecom, steel, drugs and pharmaceuticals, electronics, power, fertilizer and textiles have been deeply impacted by Chinese imports.
This is not only because of competitive pricing but the support of Chinese funding to their exports. As a result, the traders lobby which handles the imports from China is growing stronger. They have also become financially and politically influential. It is virtually impossible to stop Chinese imports because of bank rolled goods China pumps abroad.
The top imports in the year 2015-16 from China were electronics $19.8 billion, plant and machinery $10.6 billion, organic chemicals $6.1 billion, fertilizers $3.3 billion and Iron and Steel $2.4 billion. The Bank of China has a notoriously liberal policy of funding exports and projects that substitute imports. It is not only the prices and the duties but the terms of credit that is attractive for Chinese goods. They have even undermined larger economies including manufacturing heavyweights like the US, and the Germans.
GST needs to address Make in India issues
The Chinese strategy is basically to make the domestic manufacturing industry in large consumer nations uncompetitive. To ensure Chinese hegemony in exports they have an effective two-pronged strategy. Reduce imports and increase exports of key manufacturing essentials. The Chinese tax structure ensures this happens. The Bank of China ensures that finances flow adequately to achieve this. This they achieve through credit driven exports and soft loans to the core manufacturing sector.
The Indian tax regime and the Indian banks must also work in unison to achieve Make In India. This is an unique opportunity which GST throws up where the taxes on products are decided by a single authority, namely the GST council. This opportunity was not there earlier and must be used to increase Indian exports and boost Make in India.