The need for cus­toms duty ra­tio­nal­iza­tion

Mint ST - - VIEWS -

Ra­tio­nal­iza­tion of cus­toms duty and preven­tion of FTA mis­use will give a

fil­lip to do­mes­tic out­put

Asec­ond round of hikes in im­port du­ties was an­nounced re­cently, this time on tele­com equip­ment. This is a move to not only curb im­ports but also rein in a ris­ing cur­rent ac­count deficit (CAD), aim­ing to check the ru­pee’s weak­ness against the dol­lar. The In­dian ru­pee has been one of the worst per­form­ing cur­ren­cies among the emerg­ing mar­kets in this cal­en­dar year. The hike in cus­toms du­ties is seen as too lit­tle to trig­ger any rea­son­able cor­rec­tion in CAD.

The need of the hour is to take bold de­ci­sions that will not only help cush­ion the ru­pee but also usher in a sus­tained re­duc­tion in In­dia’s im­port de­pen­dency.

Im­ports are a ne­ces­sity when a na­tion doesn’t have the where­withal to pro­duce goods lo­cally. How­ever, it is in­ef­fi­cient uti­liza­tion of re­sources when a na­tion al­lows a co­pi­ous flow of im­ports even when the do­mes­tic in­dus­try has the nec­es­sary ca­pac­ity and ex­per­tise to man­u­fac­ture the same prod­ucts.

A key area that has been ef­fi­ciently man­u­fac­tur­ing and has the nec­es­sary scale to not just meet do­mes­tic de­mand but even ex­ports is met­als and min­er­als. How­ever, the lop­sided duty struc­tures and free trade agree­ments (FTA) have trans­lated into a raw deal for the do­mes­tic in­dus­try.

Sup­plies of var­i­ous ma­te­ri­als have been fac­ing per­sis­tent dump­ing for sev­eral years now. The govern­ment should ur­gently look into the mis­use of the FTAS. There have been in­stances where goods are routed through coun­tries with which In­dia has signed such agree­ments.

For in­stance, coco pow­der is routed through Sin­ga­pore, In­done­sia and Malaysia and the di­rect/in­di­rect value ad­di­tion ra­tios are not met in var­i­ous cases. It is easy to ob­tain ap­provals in these coun­tries and In­dia suf­fers loss of cus­toms duty. Strict pro­vi­sions for In­dian im­porters are nec­es­sary to curb such duty eva­sions.

In the oil and gas sec­tor, where In­dia cur­rently meets more than 80% of its de­mand through im­ports, the coun­try aims to re­duce im­ports by 10% by 2022, which is equal to sav­ings of roughly $10 bil­lion an­nu­ally. Given In­dia’s mas­sive un­tapped hy­dro­car­bon re­serves, the na­tion has the po­ten­tial to eas­ily en­hance do­mes­tic pro­duc­tion of oil and gas to cut im­port de­pen­dency by more than 10% in the forsee­able fu­ture. A cor­rec­tion in the duty struc­ture, within the World Trade Or­ga­ni­za­tion (WTO) guide­lines, and lib­er­al­iza­tion of the min­ing sec­tor is suf­fi­cient to boost do­mes­tic man­u­fac­tur­ing and sig­nif­i­cantly cut down In­dia’s im­port bill.

Such is the in­her­ent strength of In­dia’s re­sources sec­tor that right poli­cies can boost do­mes­tic man­u­fac­tur­ing and cut down In­dia’s im­port bill by as much as $20 bil­lion per an­num. For exam- ple, de­spite hav­ing the fifth largest coal re­serves in the world, In­dia is likely to im­port 164 mil­lion tonne in the cur­rent cal­en­dar year as pro­duc­tion in­ef­fi­cien­cies and trans­port bot­tle­necks force com­pa­nies to look over­seas.

Iron ore is an­other ex­am­ple. In­dia pro­duces 210 mil­lion tonnes of iron ore ev­ery year, which is far more than what it con­sumes. While the min­ing ban in Goa is un­der le­gal res­o­lu­tion, more than 150 mil­lion tonnes of iron ore are ly­ing idle in Odisha, Ch­hat­tis­garh and other parts of the coun­try. The lo­cal prices of iron ore are 30 to 40% cheaper than im­ports. Some of the largest steel com­pa­nies con­tinue to im­port iron ore, putting pres­sure on do­mes­tic min­ers. This, ac­cord­ing to data avail­able, drains out for­eign ex­change worth more than $650 mil­lion, plus an ad­di­tional loss of roy­alty of about $60 mil­lion to state govern­ment.

Sim­i­larly, im­port of re­fined cop­per and scrap have caused a for­eign ex­change outgo of a whop­ping $2.1 bil­lion. About 38% im­ports for do­mes­tic con­sump­tion re­sults from var­i­ous FTAS.

Fur­ther, the case of alu­minium im­ports is in­ter­est­ing. Data shows that In­dia’s pri­mary alu­minium pro­duc­tion ca­pac­ity of 4.1 mil­lion tons per an­num is 1.25 times its con­sump­tion. Yet, im­ports ac­count for nearly 60% of con­sump­tion. In­dia im­ports about 1.1 mil­lion tons of scrap be­cause the im­port duty on alu­minium scrap is merely 2.5%. Ex­perts fear that with the on­go­ing trade war be­tween the US and China, alu­minium meant for the US will now find its way into In­dia, wors­en­ing the sit­u­a­tion.

The story of zinc is no dif­fer­ent. While do­mes­tic pro­duc­ers can meet the in­dus­try’s de­mand, In­dia im­ported 185,000 tonnes of re­fined zinc in 2017-18. Of this, 70% came from South Korea be­cause of an ill­con­ceived com­pre­hen­sive eco­nomic part­ner­ship agree­ment (CEPA). It will be an ex­cel­lent mea­sure to change the ex­ist­ing im­port terms un­der the CEPA agree­ment with South Korea, which will re­sult in fur­ther re­duc­tion of the CAD.

A well-thought-out strat­egy that ben­e­fits the na­tion in the long run by bring­ing down de­pen­dency on non-es­sen­tial im­ports will not only save for­eign ex­change but also add to sta­bil­ity of key macro-eco­nomic num­bers.

Fur­ther, the mis­use of FTAS for var­i­ous iden­ti­fied im­ports should be looked into very se­ri­ously with heavy penal­ties on im­porters who de­lib­er­ately mis­use these agree­ments. As a corol­lary, ra­tio­nal­iza­tion of cus­toms duty and preven­tion of FTA mis­use will give a fil­lip to do­mes­tic out­put, boost the an­cil­lary eco-sys­tem and lead to em­ploy­ment gen­er­a­tion. The time to shift gears is right now.

In­dia has the po­ten­tial to eas­ily en­hance do­mes­tic pro­duc­tion of oil and gas to cut im­ports

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