External barriers cause internal injuries

The government is sure that this will force greater indigenisation, ultimately serving to make local manufacturers bigger and better, but sectors which rely heavily on imported components, not because of superior quality, butbecause of non-availability in the local market, will have no choice. As a result, input costs will increase, causing a general price rise for most consumer items. At least initially, until local manufacturing systems are established and volumes justify a reduction in prices.

Most of industry had been demanding a protectionist duty, and lobbied with government for a `level playing field’ and some protection against `imports’. But when it came, industry was caught on the wrong foot and began trading charges on who was responsible for the gaffe.

In a very broad sense, industries that have a strong home base will benefit through a more level playing field vis-a-vis those that rely heavily on imported components. The Indian infrastructure sectors – steel, oil, cement chemicals – are expected to benefit as most manufacturers use local raw materials. Besides the Budget has reduced the import duty on some specific import items, making them more competitive.

The worst sectors to be hit will be the automobiles,electronics and telecomunciations equipment and consumer durables – both Indian manufactures and multinationals – all of which have a very high import content and really have no way of replacing all the components with locally manufactured ones. For example, The government itself has prescribed only a 70 per cent indigenisation norm for automobile manufacturers, keeping in mind the minimum import required for such products.

“In today’s competitive environment, resorting to tariff barriers cannot ensure growth of domestic industry. If India has to develop core competence in any sector, imports will have to be accepted as an integral part of overall business strategy,” says S G Awasthi, Managing Director Daewoo Motors. The resulting increase in cost for the industry is expected to be roughly 8-9 per cent.

And domestic industry is still wondering. While all the chambers of industry have welcomed the principle behind the additional duty, there is no agreement on what the rate should be. There is also someconfusion on what will be the `right’ rate. Says Amit Mitra of the Federation of Indian Chambers of Commerce and Industry (FICCI), “There was some confusion in the numbers, not in the principle”.

He expects that the 4 per cent duty will force companies to indigenise faster, forcing an improvement in quality at the same time. But as Awasthi says, 100 per cent indigenisation is not always possible. In the case Daewoo’s Cielo for instance, the company would need to sell between 2 and 5 lakh cars a year to be able to fund the indigenisation of the multi-point fuel injection system, which is now imported from Korea. Newer companies like Ford and later Hyundai will find the going tough until they reach optimum volumes in India.

For local companies the duty is expected to serve as compensation for the high cost of borrowing and the poor infrastructural facilities, but most industries fear that with the facilities for project imports continuing, key inputs will cost more for local manufacturers.

One of themost important local industries that is expected to benefit is the oil ans gas sector – while increasing the duty on import of petroleum products by 4 per cent, the government has reduced the import duty on crude by 5 per cent, improving the ptotection for Indian refineries such as ONGC, OIL, GAIL, IOCL, BPCL and HPCL.

The biggest dissent came from the exporters who have to depend on import of components – especially those who are covered under the Export Promotion Capital Goods schemes (EPCG) because of the export obligation of five times the import value. And although the finance ministry had agreed to exempt all such export schemes from the duty, are yet to notify the decision. Commerce ministry sources say the indecsion has forced exporters to either put off shipments or pay the increased duty on imports, causing a huge financial burden.

Exporters of engineering and computer hardware will be particularly affected by the duty as they rely to a very large extent on imported materials and prices arebound to rise, making it difficult to compete with Korean and Japanese products. The government’s attempts to broadbase the Indian export basket to include electonics and engineering goods in a big way could come a cropper.

Says Sunder T Vachani, Chairman of the Electronics and Software Export Promotion Council (ESC), “The import content for us is typically in the 30-35 per cent range. If the duty is charged, the elctronics industry alone will,account for roughly 14,000 crore annually, affecting our margins”. The industry cannot afford to increase prices correspondingly because of the competition from the South Asian countries.

The exporters are, in fact, now demanding compensation for the period between the rollback and the notification of the decision, when they have been charged the 4 per cent import duty.

Within industry, the bitterness remains, with the different lobby groups still trying to pin the blame for the duty somewhere. Says Mitra, while adnmitting that some of it may have started in aFICCI study that estimated a 7.76 per cent disadvantage for local companies vis-a-vis multinationals. “We only wanted an optimum level of tariff protection, not a minimum level of tariff protection.” FICCI estimated that the tax disability for Indian industry through the central sales tax and octroi duties worked out to 7.76 per cent in addition to rouhgly 10 per cent disability on account of the cost of borrowings and lack of basic infrastructure for manufacture.

FICCI also maintained that the reduction in Customs duties over the last few years had fallen even below the WTO commitment, leaving Indian companies exposed. “India has negotiated the binding rates in the WTO for over 4000 items. In most of those, our rates of Customs duties are lower by almost 10 per cent already.”

The Confederation of Indian Industry, on the other hand, has welcomed the duty at the rate of 4 per cent, while criticising the initial 8 per cent duty. “We had asked for an across-the-board duty of 5 per cent – 4 per cent tocompensate the central sales tax and one per cent more as protection. Besides, we wanted it to be Modvatable. The finance ministry has exempted exporters and traders, which again is a disadvantage to local manufacturers,” say CII officials.

According to CII, if traders are permitted to import freely at concessional rates of duty, they will be in a better position to compete price-wise with local manufacturers, defeating the purpose of the additional duty.

The final word on protection has not been said. Perhaps the it will be a long time before industry realises that there is no perfect solution to protection.