Last month the finance minister, Arun Jaitley announced measures to curb ‘non-essential imports,’ so that he can arrest the widening current account deficit (CAD) and probably also reverse the free fall of the value of Indian Currency – the Rupee. The moves look apt! But is it enough? Is it a case of “penny wise”?
With elections around the corner, any government would probably look for a quick fix. But are the 20 items where import duties were increased last week unfortunately not going to provide that quick fix? So, what is the solution? The Government should probably look for steps for a long-term solution. In a nutshell, the Government should look for increasing exports and lowering imports.
When it comes to imports, the biggest contributor is the energy sector (crude oil etc.). But, what is equally important is that, other mineral and metals weigh more when it comes to imports. And together (Crude/Energy, Mineral and Metal sector) contributes to 54% of India’s imports. (Table)
IMPORTS
| Commodity | Value ($ mn) | %age | |
| 1. | Mineral Fuels, oils & products | 1,32,295 | 28.4 |
| 2 | Precious Metals & articles thereof | 74,710 | 16.1 |
| 3. | Iron & Steel and articles of iron & steel | 14,637 | 3.1 |
| 4. | Ore, slag & ash | 6,487 | 1.4 |
| 5. | Chemicals, Compounds of precious metals, rare earth etc. | 6,038 | 1.3 |
| 6. | Aluminum & articles thereof | 4,523 | 1.0 |
| 7. | Copper & article thereof | 4,508 | 1.0 |
| 8. | Salt, sulphur, stone etc | 2,511 | 0.5 |
| 9. | Lead, Zinc and Nickle & articles thereof | 2,247 | 0.5 |
| 10. | Others (tin, base metals, misc. articles) | 1,540 | 0.4 |
| Total | 2,49,523 | 53.6 |
Source: Ministry of Commerce
Out of the total IMPORTS worth $4,65,578 million in the last fiscal year, the above 10 categories of commodities (imports worth $2,49,523 mn) had a corresponding EXPORTS worth $1,14,187 mn (out of total exports of $3,03,376 mn). Hence, these 10 categories left India with a trade imbalance of $1,35,336 (out of total trade imbalance of $1,62,202).
Let’s see how the above-mentioned commodities can help solve the issue of widening CAD and falling rupee to a great extent.
Oil & Gas sector
Domestic oil and gas production has been falling for straight 5 years now, obviously triggering more imports. In spite of arresting the trend, the government took some decisions, which have probably amplified the problem. For example, the new policy of allowing the extension of existing Production Sharing Contract (PSC) with 10% more share to the Government as profit, is a disincentive for petroleum.
With these deterrents, investment would obviously be difficult to come by, which would ultimately enhance domestic production and trim the $100 billion of IMPORT bill (22% of IMPORT). Similarly, the Government needs to push the enhanced oil recovery (EOR) policy with more incentive. EOR has a potential to substitute 10% of imports from domestic production.
Another aspect where domestic producers get a rough deal compared to imported crude is the 20% cess. This cess is not even a pass through compared to no cess for imported crude!
Apart from the above factors, bringing the entire petroleum sector under GST will work as the biggest incentive for the industry.
The steel and iron ore sector
This segment is the easiest one where things could be done easily (to help the Rupee and narrow CAD) but surprisingly nothing is done.
India’s 210 million tonnes production of iron ore is above the requirement of steel mills’ present capacity. However, imports are allowed and exports from states like Karnataka – where public sectors giant NMDC is the biggest producer – are not allowed.
Here, finance ministry can kill two birds with one stone.
- Remove exports duty and allow export and hence earn foreign exchange.
- Impose import duty (may be 30%) to discourage import and help lessen the widening CAD and also earn along with supporting the domestic producers.
- Another aspect is Goa, from where the entire production used to be exported resulting into earning of foreign exchange. However, mining has come to standstill because of the interpretation of a Portuguese era law. The central Government needs to find a way to bring in changes in the retrograde – either through ordinance or by changing the relevant law whenever Parliament convenes next.
Zinc
Just like in the case of iron ore, despite India having an extra capacity (of 80,000 tonnes), India still imported 185,000 tonnes of refined ZINC (70% of it coming from Korea).
Here, the government just needs to give a little bit more push to the ongoing India-Korea CEPA (comprehensive economic partnership agreement). Imports duty should be imposed (under changed product specific rule or PSR for Zinc from chapter 79 to regional value content or RVC 35+CTH).
Copper
The Government can be the biggest beneficiary here in two ways. One way is through making the sector so attractive that the public sector miner Hindustan Copper Limited (HCL), which is in fund raising mode, gets a very good valuation. The second way is through earning forex by hiking import duty on refined copper from 5% at present to probably 7-8%.
Simultaneously, a 2% export incentive on copper cathode rods would do a great deal for HCL and help the Government push exports.
Apart from these, what the Government and probably the judiciary should also look into is the recent revelation about how vested interest parties (by bribing and other unfair means etc.) scripted the closure of the Tuticorin plant. The Government should look into early resolution and opening of the plant for the larger good.
Aluminum
China’s step to protecting its own economy is hurting India as the IMPORT of Aluminum scrap (HS code 7602) has suddenly gone up. Why can’t India (just like China) too hike import duty from the present 2.5% to 10%? Similarly, on normal aluminum (HS code 7601) too import duty should be hiked from 7.5% to 10%. The import duty on downstream aluminum (HS code 7603-7616) should also be hiked.
In Short
Whether it is case of oil, gas, zinc, iron ore, copper or aluminum, all the steps stated above are “doable” without much hassle. And these steps will result in gains in terms of reduced imports worth $18.2 billion and enhance exports by 2.8 billion. So, the total gain for the economy would be worth $21 billion.
Along with the measures announced by the Government, if the steps stated above too are taken into account, India will gain in a big way in the next six months or so. Of course, additionally, India can also consider stricter restrictions on the IMPORT of Gold, Silver and Diamond (total imports of precious metals were $75 billion), so that domestic production can instead be encouraged.
source https://indiaoutbound.org/penny-wise-pound-not-so-foolish-right-decisions-needed-to-cut-import-and-boost-exports/
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