FTAs killing manufacturing, DIPP seeks rectification of inverted duty structure

The department of industrial policy & promotion (DIPP) has sought rectification of anomalies in the inverted duty structure, arguing that they are undermining domestic manufacturing by making imported finished goods cheaper.

In its budgetary consultations with finance minister Arun Jaitley, the department has said that signing of free trade pacts with Japan, South Korea and the 10-nation Asean has made locally-produced goods less competitive in the Indian market.

An inverted duty structure emerges when import duties on finished products are lower than those on parts/ raw materials, effectively incentivising imports of goods rather than imports of parts and inputs for local manufacturing.

India’s manufacturing sector growth contracted 0.7% in 2013-14, first time since 1991-92 when the country embarked on economic reforms.

The commerce department, which has been under fire for a while for agreeing to lopsided free trade agreements (FTAs), says nothing can be done on the FTAs already signed since they are agreements between two sovereign governments.

It has instead suggested forming a small committee to identify those raw materials for which the ‘most favoured nation’ rate could be reduced without impacting the domestic market of those products. “We agree in principle that there should not be any inverted duty structure. But cannot do anything with the free trade pacts already signed. If duty inversion has to be remedied, it has to be through adjustment of MFN duty on the raw materials,” said a commerce department official. He said certain inversions are necessary to protect the domestic industry, so there is a need to identify where a higher duty on raw material is necessary.
Defects in India’s duty regime are also responsible for duty inversion, with basic Customs duty on raw material higher than that on finished products. DIPP has circulated a study on inverted duty structure conducted by industry body Ficci, seeking comments and suggestions from various departments to address the matter in the upcoming budget.

“It is complex as reducing the duty on a particular raw material may open import route from another country. We have suggested that a committee be formed to give recommendations in a month’s time to identify those raw materials where duty could be significantly reduced without it affecting the domestic production,” said the official quoted earlier.

The complexity arises from the fact that the raw material of a particular finished product (identified for duty inversion) is also a part of input for some other sector. For example, several components in a steam boiler are also used in other industries. One example of the inverted duty structure is the 10% basic Customs duty imposed on tyres while the Customs duty on its key input-—natural rubber—is 20%.

“Tyre imports enjoy preferential duty under India-Asean FTA, Sri Lanka FTA, Singapore CECA... which leads to imports at concessional rates from various countries ranging from 0% to 8.6%, increasing the incidence of inversion,” said the Ficci report.

Duty on rubber is high to protect the 12 lakh rubber growers of the country. Ficci, in its study, has identified nine manufacturing sectors—aluminium products, capital goods, cement, chemicals, electronics, paper, steel, textiles and tyres—which have duty inversions, flagging these as being inimical to the domestic industry.

India and South Korea signed a comprehensive economic partnership agreement, which came into effect in 2010, where India agreed to eliminate duties on 75% products imported from South Korea on a Customs value basis. CEPA with Japan came into effect in 2011. Korea has already sought a review of the FTA signed to shorten the tariff reduction time and reduction of the sensitive list.