The big Budget push to ramp up domestic manufacturing and improve export competitiveness

Economy


The Economic Survey 2020-21 and the Union Budget 2021-22 are remarkably different from previous ones. While the survey provides the analytical backstop for the government’s intent to borrow, build and grow, the budget itself is directionally clear and unambiguous about broad strategy. To build and support local industry — the AatmaNirbhar Bharat (ANB) programme — it is recalibrating the entire range of tariffs on imports and exports.

“Our customs duty policy should have the twin objectives of promoting domestic manufacturing and helping India get onto global value chain and export better,” Finance Minister Nirmala Sitharaman said in her budget speech. “The thrust now has to be on easy access to raw materials and exports of value-added products.”

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Sitharaman said the government was overhauling the entire structure; it had already eliminated 80 outdated exemptions and was reviewing another 400. On October 1, 2021, a new customs duty regime “free of distortions” will be put in place.

The Medium-Term Fiscal Policy cum Fiscal Policy Strategy Statement in the budget says the customs duty rate structure was guided by a conscious policy of the government to incentivise local value addition under Make in India and ANB. That requires low duty on raw materials and high tax on imported products that compete with local goods.

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“Since the 2000s, every government has been trying to find a way to raise the share of manufacturing in GDP, without reverting to the failed policies of 1950-80,” says Arvind Virmani, former chief economic advisor (CEA) and chairman, Foundation for Economic Growth and Welfare. Virmani points to IMF estimates which show that average tariff rates rose by 1.3-1.5% during 2014-19 while the Make in India policy was in operation. The AatmaNirbhar Bharat policy brings the focus back on increasing competitiveness through domestic policy reforms.

Duties are now structured to incentivise investment in areas like petroleum exploration and electronics manufacturing. They have been raised on products that are already made in India or which domestic manufacturers aspire to make. Over the past six years, basic customs duty (BCD) on 4,000 tariff lines or about a third of the total has been raised. The BCD rates on components used in mobile phones, for instance, are set differently under what it calls a phased manufacturing plan.

“Domestic electronic manufacturing has grown rapidly,” said Sitharaman in her speech. “We are now exporting items like mobiles and chargers. For greater domestic value addition, we are withdrawing a few exemptions on parts of chargers and sub-parts of mobiles. Further, some parts of mobiles will move from ‘nil’ rate to a moderate 2.5% (customs duty).”

In a bid to encourage local manufacturing, the 2016 Budget removed BCD exemption for chargers, adapters, battery, wired headsets and speakers used in manufacturing mobile phones and inputs used to make these components duty free.

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The 2021 Budget points out that free trade agreements and information technology agreements under the WTO have badly hit domestic manufacturing.

“In the absence of an industrial policy, India’s WTO-plus tariff liberalisation under these FTAs was carried out without any strategic coherence,” says Smitha Francis, economist and consultant at Institute for Studies in Industrial Development, in her paper “FTAs and Export Competitiveness: Policy Lessons from a Decade of WTO-Plus Tariff Liberalisation”. Francis points out that a telling indicator of weak export competitiveness is that India’s exports rose in capital and technology-intensive sectors such as vehicles and parts, non-electrical machinery, organic chemicals, pharmaceuticals, electrical machinery, iron and steel and articles of iron and steel. But “the share of its manufactured exports going to the mature developed country markets has declined. It is in the case of developing country markets that India’s exports have been relatively strong”, she points out in the paper.

The Union budget says an analysis of import data of manufactured commodities showed that wherever import taxes were raised, the import volumes from FTA partner countries increased, indicating re-routing to take advantage of the treaty. It, however, remains to be seen whether moving customs duty up and down can raise competitiveness of domestic industry.

“Starting with corporate tax reforms in September 2019, there has been a series of economic reforms, including in the 2021-22 Budget, designed to improve the productivity and competitiveness of the Indian economy, including the manufacturing sector,” says Virmani.

Building a tariff wall may be counter-productive in the long run, says NR Bhanumurthy, vice-chancellor, Bengaluru Dr BR Ambedkar School of Economics University. “Segmented duty structures lead to ambiguity and micro-management of public policy by customs,” says Bhanumurthy. “If we continue to stay with it (high customs tariffs), it will have an adverse impact on domestic producers. There will be permanent damage to export competitiveness.”

Virmani says India needs a dualistic foreign trade policy, which reduces import dependence on a monopolistic manufactured goods producer like China, while attracting supply chains from the rest of the world, through lower, more uniform import tariffs. “There are some hints of this in Part B of FM’s budget speech, relating to numerous customs duty exemptions and inverted tariff structure. Though the production-linked incentive scheme is a good start (for efficient import substitution in manufacturing), the government needs to go much further in reforming customs tariff structure, to achieve the goals of a dual trade policy,” he says.



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