February 8, 2018 Yes Institute

Customizing Make in India

Author: Sidharth Sonawat, Fellow, YES Global Institute

One of the less analysed aspects of Budget 2018 is the rise of customs duty on a number of items as India applies more levers to accelerate the ‘Make in India’ initiative. Some analysts have raised fears of protectionism emanating from these measures detrimental to long term health of the economy. A closer scrutiny of the measures reflects that there is a lot of homework which has gone behind the list of items identified for higher customs duty. Let’s look at the drivers of this change in trade policy in detail:

First, the custom duty measures seek to give a fillip to emerging areas of manufacturing and consolidate India’s competitive advantage in some others; India is gearing up to be a major electronics manufacturer in the near future. Various segments of electronics (automotive, mobile phones, electronics et al) have shown a growth anywhere in the range of 13% to 54% compounded growth over the period 2012-13 to 2016-17 (Exhibit 1).

Exhibit 1- Source: Ministry of Electronics and Information Technology, GoI Annual Report, 2016-17

This has belied forecasts of several trade experts who believed that India has lost the electronics manufacturing bus permanently due to its late entry into the global market. Electronics is also the shining star in terms of the ‘Make in India’ initiative. The duty intervention in certain auto ancillaries and import of complete vehicles into India is to sustain and deepen the competitive advantage in this area. India is on the cusp of becoming a giant in the area of automobiles and these measures shall lead to movement towards 100% indigenization to truly emerge as a hub of automobile manufacturing. The sector has a long tail of externalities across the capital goods sector and most of the output is contributed by a number of SMEs who supply to large OEMs.

Secondly, the measures are also targeted to protect domestic manufacturers from cheap Chinese products as in the case of Tyres. This is also in continuation with the move in September 2017 wherein anti-dumping duty was imposed on import of certain type of radial tyres used in commercial vehicles to protect domestic manufacturers from below cost shipments from China for five years in the range of USD 245.35 to USD 452.33 per tonne. Earlier in the year, India has beefed up lax implementation of standards for consumer goods to stem the flow of sub-standard products into the country. The raising of duties in food processing also follows the same lead; new norms make it mandatory for importers to obtain a license, streamlines standards for a level playing field and a minimum shelf life of 6 months for imported processed foods. Overall, the intention is to attract large investments into the food processing sector to enable India’s emergence as a sourcing hub for the global food processing industry.

Next, the labour intensive nature of the items has been particularly identified for higher import duties including footwear, precious stones and jewellery. This is on the background that around three-fourth of high-end sports shoes sold by companies, including Nike, Adidas and Puma are imported. The footwear industry has also seen a reprieve as economics of the business have been impacted due to implementation of the cow slaughter law in a few states.

Finally, by lowering corporate taxes for MSMEs, it is hoped that exports performance can be revived. India’s exports are unusual in that the largest firms account for a much smaller share than in other comparable countries. All the sectors identified for interventions are dominated by medium sized enterprises and a lowering of taxes shall provide an incremental capex opportunity to such entities.

While some of the measures may land India into the WTO, for the most part India has a very genuine case for shielding its terrain for domestic manufacturers from unnatural competition from abroad. The government however, needs to be aware that these measures have to be time bound and dynamic to have the desired impact on the health of the economy.