June 7: Government policies are often double-edged swords. They can provide industry an opportunity but can withdraw the incentive to get competitive as well. Yashwant Sinha's customs duty hikes have offered industry unasked for bounties that could provide interesting short-term bottomline benefits but in the long-term could mar just as well. Industry bigwigs had asked for a 5 per cent interim duty in several sectors to allow industry time to readjust to the new global competitiveness paradigm. Instead industry has been given an 8 per cent customs tariff that will require another round of reforms to change its course. The danger lies in this fact, not in the tariff itself.Economists could easily demonstrate with the use of theoretical models like the Stolper Samuelson theorem that an increase in the relative price of a commodity through import tariffs will cause a country to produce more of the protected commodity at the expense of other exportable commodities. Real wages in the industry rise but thenation as a whole is harmed by the tariff as the eventual reduction in the earnings of the owners of capital exceeds the gains of labour through wages. However, if there is a real intention on behalf of the government to withdraw the tariff increases after a specific, short-term time period, then the short term benefits could help domestic industry.Yet there is an opportunity for Indian industry. Use the time and the cushion that the customs duties provide to get competitive not merely in Indian terms but in global terms. The danger? Familiar complacency that could make short-term profits permanent long term fixations and the fact that no industry anywhere in the world has really used the time from such measures to get competitive. The double edge of the protectionism sword can be best witnessed in the electronics industry. The television industry has for the last couple of years been focusing on lowering retail prices in order to increase market size - a necessity in order to achieve much neededeconomies of scale.The customs duties will strongly deter this process. Picture tube prices which account for 40 per cent of the retail price of TV sets are likely to go up plus the import content of each set which is roughly 20 per cent. Net effect: a 5-7 per cent increase in retail prices which coupled with an expected rise in interest rates later this financial year will mean that the 20 per cent industry growth rate of 1997-98 will definitely not be matched this year. Admittedly MNC companies in television manufacture will be hit much harder but clearly the drive to expanded the market and thus improve communication was pushed very greatly by the entry of the MNCs. On the other hand take the steel industry. At first glance the industry's bottomlines will get a boost. Sinha's budget has restored the tariff differentials between hot rolled coils and cold rolled coils with the import tariffs on the latter being raised by 5 per cent. These measures should offer the industry what it asked for - a levelplaying field.But the danger is that in the long run it offers Indian steel manufacturers no real incentive, unless driven by self motivation, to rationalise their cost structures and competitiveness. For instance, the 1997 price difference between Indian CR products and global CR products of nearly US $120 was not driven only by the lower tariff regimes as Indian industry tried to project. It was also driven by the inefficient manufacturing cost structures of inherent several Indian steel companies. The dangers in the protectionist philosophy are best indicated in the experience of US steel plants. In the 1970s and 1980s, the US steel industry found it difficult to compete with cheaper, imported steel. Many steel workers lost their jobs. The government responded with a regime of protectionism between 1974 and 1993 including protection from imports, originally in the early 1970s the protectionism was to last three years - a time frame that the steel makers had said would be needed to modernise. The netresult? By end 1980 itself the harmful effects were visible. Wages in the industry rose from US $9.90 per hour in 1970 to $17.46 per hour in 1980, an increase that was 60 per cent higher than wage increases in the rest of the US manufacturing sector.Eventually this mix of high wages and 20 years of protectionism cost more jobs among users of steel than were saved in the steel industry. Americans paid nearly $5 billion a year in higher prices. Thus, while protection may have saved jobs in the steel industry, it destroyed jobs in other industries that use steel to manufacture their products with manufacturers using US-made steel paying 20 to 25 per cent more for their steel than was paid by their foreign competitors, impacting industry competitiveness all around. When the Indian capital goods industry expressed worries over the fact that they had received very little from Sinha's budget, the worry stemmed from the price increases in steel and non-ferrous metals which would be crucial components of capitalgoods manufacture.The US industry finally got competitive not because of the protectionism but because of a round of joint ventures with foreign firms and massive foreign investment. The cushion of protectionism turned a negative circle. Sinha's inability to offer the customs tariffs as an interim measure offers this very real danger to Indian industry.
