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Concepts & Tutorials

India Gets Protectionist: Stop Those Pesky Foreigners Who Make Things Cheaper Than Us

We’re getting into protection zones.

The Finance Ministry yesterday announced a 20% “safeguard” duty on steel. This is to protect domestic industry, apparently, because China, Japan, South Korea and Russia are selling steel at very very low prices.

On the representations of the domestic steel industry, the Director General of Safeguards had initiated safeguard investigations into alleged increased imports and consequent injury to domestic industry and issued a preliminary finding dated 09.09.2015 recommending imposition of provisional safeguard duty at the rate of 20 % ad-valorem, for a period of 200 days on “Hot rolled flat products of non-alloy and other alloy steel in coils of a width of 600 mm or more” classifiable under heading 7208 or tariff item 7225 30 90 Chapter 72 of the Customs Tariff Act, 1975.

If you plot the exports and prices per unit (from Zauba) you get a chart that does show increasing volumes but at much lower prices.

image

But it’s not entirely right to have this kind of duty; we should be getting cheaper steel to build industry, make cheaper cars and pass on the benefits to our people. We didn’t allow that with crude either (high excise duty, to protect the government). We aren’t going to let it happen with steel either.

(also read: Steel duties will not change anything since we have FTAs with Japan and Korea – but note that a safeguard duty will apply to Japan and Korea too)

Now Demands for Textiles and Tyres Too!

So apparently, there’s even more demand for protection.

India’s textile industry – who’ve done extremely well with the drop in cotton prices recently – are demanding duties on Chinese Textile imports.

“If the present level of dumping continues unchecked, the domestic textile industry will be extinct over the next few years. China, facing over capacity, has for long been dumping their fabrics and ready-made garments to our market through Bangladesh, Nepal, Vietnam and even Cambodia,” Chairman for Policy, Apparel Export Promotion Council Premal Udani told PTI.

Udani’s firm Kaytee Corporation is one of the largest garment exporters to American retail chains.

This is so strange. Because if you are an exporter, you are competing with China in the international market, not in India. And the duty won’t do you any good.

And then you have this too:

If MRF claimes that anti dumping duty is needed, this is shocking. Because despite the big drops in the price of rubber and crude (which is the base input for synthetic rubber) we have not seen a big drop in prices of tyres. And Chinese manufactured tyres are now offering big 25% to 40% discounts on tyres compared to the Indian biggies. They simply have to get with the program.

Duties are NOT the answer

Increasing duties will not help us. If we are to “make in India” it shouldn’t be so much more expensive for us compared to manufacturing in, say, Sri Lanka. And we should not have duties for intermediates like steel – after all, cheaper steel means a benefit to us. So what if a few companies are in trouble – you see IT companies die all the time, have you heard of them asking for support to stop competition? The steel industry needs some players to die before they reinvent themselves, and are likely to hit a few banks heavily too. But that will not be solved by duties.

And if we think the rest of the world will sit idle while we impose duties we are grossly mistaken. They’ll wait and watch, and then hit us with something else.

This is probably just the beginning. We’re going to see a lot more in this space.

  • Harish says:

    Deepak you should mention that the Chinese Government is actually subsidizing exports so that products are being sold below the cost of manufacturing them! The products are sold at a higher MRP in China than the export prices.

  • lohit says:

    What will happen then to our auto and auto parts exporters ? Will they get a subsidy to offset this tax on their inputs 🙂

  • JustSaying says:

    You make a valid point about keeping costs down. I believe its a catch 22 situation.
    Steel plants employ lot of people and steel manufacturing involves big investment too. If people lose their employment, what will government do with cheaper steel made cheaper cars and houses – no one will be there to buy it? Then car manufacturers will ask for subsidies. Plus, countries like China subsidize exporters – not sure if subsidy is given to steel manufacturers in China.

    • India subsidizes exporters too. It offers 5% of any textile contract back to the manufacturers. Which is why a customs guy is required to seal each box (otherwise people would send air, do invoicing and get that 5% for themselves).
      People who lose tehir employment find it elsewhere. You don’t subsidize IT services anymore, what happens when companies shut? When Nokia shut? It’s a temporary situation and will be fixed over time – people will reskill themselves.

  • esotericBlue says:

    protectionism of any sort will least benefit india. other than “zero,” our contribution to the scientific body of knowledge is close to that numeral. unfortunately, pun intended.

  • Krish says:

    Deepak, Every country has protectionist measures one way or other. Does airline industry in USA has reduced any prices on account of cheaper ATF. Infact their supreme court asked for investigation upon learning that US airline industry is making billions of dollars of profit. Does the consumer in USA is benefitted by cheaper gas prices. Answer is again no. I am sure it is the same story with China, Japan and so on. If you allow these capital intense local players to die, you could never see domestic investment. You would only paving the way for foreign players to come which is not in the best interest of the nation.

    • I disagree with this argument in this specific case and in general on this thinking. The most rapid advances have been made wehre there are no worldwide barriers (see cellphones, computers, the internet) The US consumer HAS benefited from lower gas prices. Airfares have fallen all over the world. (http://blogs.wsj.com/economics/2015/08/19/airfares-fall-by-the-most-in-nearly-two-decades/ for example) So the answer is YES.
      Steel is not easy to set up but they don’t deserve this kind of protection either. However if they price steel at lower than they price steel in their own country then it’s probably worthwhile to set up barriers.

      • Suneet says:

        The argument is valid if you believe the foreign exporter of steel is indeed selling it above their costs. But with most steel companies in China straddled with over capacity and state support to finance the production, they are willing to, and are actually selling below their costs just to keep it running. This could be argued both ways, but a steel industry takes years to establish, and we shouldn’t just let it die because of a temporary over-capacity in some other market.

  • Rajiv says:

    Spot on Deepak duties only to help one sector will not be helpful. Ordinary citizens cannot take advantage of globalization and advantage of cheaper rates due to it.Your example of MRF is very apt.

  • Arvind Kumar says:

    Dear Deepak,
    It was spot on. Everyone is milking the consumer.
    Crude oil has been halved but retail consumer is paying the same price almost.
    Steel prices has been falling, but we almost at the same level of 2008-09.
    WPI is in the territory of deflation, and we have similar retail food inflation as in 2013-14.
    From government to corporate sector, it is same story.They want subsidies, protection etc. But they are not ready to reform. Real estate sector is holding the prices and forcing RBI to lower rates. But they do not want to lower prices. Homes are out of reach of Middle class, but want still higher prices. After all where are they going to get customer.
    Someone somewhere has to give in. System is corrupted. And some kind of implosion waiting to happen.

  • Deep says:

    Agreed completely with author.Today read in the newspaper that import duty is hiked on edible oils.This is non sense.It only benefits few business groups like Adani,Jindal etc.It is definitely achhe din for crony capitalist,the consumer be damned.

  • Shan says:

    Interventionism is always unfortunate and especially after the promise of ‘minimum government ‘ this is truly sad.

  • rbbhatia says:

    Very good discussion…..It is such an irony that inspite of having such an thumping majority in Lok Sabha, purely achieved on the plank of development, and despite having such multi commodity – multi year low prices , the government has not shown any positive or proactive approach to leverage growth or development ….
    These kind of short cuts

  • rbbhatia says:

    Very good discussion…..It is such an irony that inspite of having such an thumping majority in Lok Sabha, purely achieved on the plank of development, and despite having such multi commodity – multi year low prices , the government has not shown any positive or proactive approach to leverage growth or development ….
    These kind of traditional short cuts are exposing shallow thought process and intent…Alas , What an opportunity we are sitting on !! Congrats Deepak – very thought provoking articulation & discussion !!

  • Sandeep Barve says:

    Deepak – agreed that we need cheaper inputs for our industry, housing, etc. But domestic producers also need some incentive to keep their factories running. The prices at which tyres and steel is being imported to India are untenable.
    I remember a certain East India Company similarly wrecked Indian textile industry forever by bringing cheap(er) mass produced Manchester cloth.