Dumping of Made in China iron and steel products, when more than 20% production capacity in the sector lies idle in India, could kill the very future of Indian steel manufacturing

Steven Philip Warner | @TheDollarBiz

We carry around the burden of an ever-growing trade deficit with the world with impossible ease. The many unprecedented-as-anticipated interpretations of India’s snowballing inability on this front are forgotten sooner than charity dinners. And India moves on... Amidst this now-popular culture of being at peace with trade deficits however, there is a catcall that makes India uncomfortable. Its deficit with China. What has occurred in the past half-a-decade proves why the India-China inequation is a blockbuster nightmare-in-the-making. In the past five years, India’s trade deficit with the world grew at a CAGR of 9%. That with China grew at 20%. Today, China accounts for 27% of India’s deficit, up from 17% five years back. While these numbers are manifestations of the infectious hunger and relentless attitude amongst stakeholders of India’s import community [note: we are proud of India’s importing community, to whom we dedicate this issue’s cover story], it is important to note that a growing deficit while talking about the world’s factory is not amusing. India is either confident of its incompetence in manufacturing or unprepared for now.

Beyond the restlessness of India’s import community, is a walk for a bigger cause. And for that, some drastic measures to avoid killing our homegrown chickens before they hatch is critical. One of them being adoption of a fair degree of protectionism. Any economist worth his salt will appreciate that if the Indian manufacturing industry has to be allowed to grow, the onslaught from Chinese assembly lines should be filtered. We are not talking of imposing a ban on imports from China, just a mild application of import duties to protect industries that bear potential to make the Indian elephant dance!

The ban on Chinese firecrackers made headlines recently. While we do appreciate the act on the part of the policymakers, there are worthier industries that need immediate policy intervention. During the first quarter of FY2015, nearly Rs.5,000 crore worth of iron and steel (various forms) were shipped from China to India. If the rate of imports continue, India will end up importing 50% more steel from China this year. Alarming! Dumping of steel, when more than 20% production capacity in the sector lies unutilised in India, could kill the future of Indian steel manufacturing. Perhaps the government can think of raising basic customs duty from the current 7.5% to 15% on iron and steel products and imposing an additional anti-dumping duty to control inflow of Made in China steel.

The SME-dominated electrical machinery and equipment manufacturing industry in India is another patch of our pond disturbed by incoming ships from China. This category witnessed the single-largest imports from China in FY2014 (28%). Lower excitement about Made in India, appealing prices of Made in China, and 30%-plus idle capacity in this industry in India are all rendering this industry non-competitive. How its muscles are being incapacitated by the Chinese onslaught can be gauged from the fact that India’s production in this category grew just 3.5% vis-a-vis a 13.2% rise in imports from China in 2014. What should be done? Increase basic duties by 3-10%. Beats us how despite a 16%-plus wholesale margin on a typical cellular handset imported from China, the basic duty levied on it is 0%. Critics will condemn this suggestion on the ground that increasing tariff on Chinese handsets will lead to an increase in their prices in India. Going by how our handset market has been flooded with options, a near-perfect competition situation will ensure that prices change little. And even if economics fails us, so be it! It’s time to make some bold moves. We need to stitch what we wear.

There are other industries too where a need to regulate imports from China is urgent – silk, footwear, khadi, toys, auto parts, ceramics, finished plastic, solar cells... the list is long. While India grants protection to some industries, it has to simultaneously induce growth in their manufacturing capabilities. A timeline to achieve predetermined targets has to be set. Offering adequate incentives to attract FDI and supporting Indian manufacturers is crucial. [Mindlessly blocking Chinese imports isn’t the secret.]

So here’s the deal. Let India import raw materials from China and sell back finished products. Chosen on a case-to-case basis and wisely, we could have a scenario where there is minimal (zero!) duty on raw material imports in industries where high import taxes are levied on finished goods.

What India needs at this point in time to make ‘Make in India’ a reality is the right blend of intelligence and impatience with implementation. China will react. So will WTO.