That the government of Narendra Modi is considering to implement tougher import rules on foreign steel in the run-up to the general elections is not coincidental. India has been developing steadily, and a particular focus has been placed on the country’s indigenous steel and aluminum industries, both of which play a major role in the country’s long-term strategic outlook as it aspires to become an economic superpower.
As part of this strategy, the government introduced an ambitious ‘Make in India’ initiative in 2014, with the aim of fostering innovation and encouraging investment in industries thought to be strategically important to the economy. It represented a significant step forward towards making India a more business-friendly environment by relaxing punitive regulations and easing the bureaucratic processes that often stymie investment.
The initiative has generally brought about positive developments. It most notably leads to steady improvement of India’s rank in the World Bank’s “Ease of Doing Business’ index, where it jumped from place 142 in 2014 to 77 in the 2019 report. It may also be credited for making India the top FDI destination in the Asia-Pacific for the first time in 20 years last year when it attracted $38 billion dollars compared to China’s $32 billion.
However, while these numbers are impressive, some worrying signs are on the horizon as the Commerce Ministry is mulling over a tax hike to insulate domestic steel and aluminum markets from foreign products. According to the plan, higher duties would render imported metal more expensive than domestic production, encouraging downstream industries to use Indian-made metal. However, this could create more problems than it solves as industries like the car sector rely heavily on foreign-produced metals due to the fact that local steel companies do not manufacture the type of specialized, high-grade steel they require. The continuous production of cars would, therefore, be at risk, warn the manufacturers.
But if the steel is a concern, then so is aluminum, arguably of greater and growing importance. The ‘Make in India’ initiative has increased the consumption of the metal, which is an essential component of industries such as aerospace, transport, and defense, where it can improve fuel and cost efficiency.
Despite the fact that much of India’s aluminum demand is met through imports, the country’s primary aluminum producers are now demanding the government hike import tariffs to (allegedly) combat the fallout from the US-China trade war. They are asking for a rise in both primary aluminum and aluminum scrap import duties from 7.5 percent and 2.5 percent respectively, to 10 percent across the board. As it turns out, the Commerce Ministry has recently signaled it will give way to their request.
But such a tariff hike would be potentially disastrous for India’s aluminum consumers – mainly the smaller companies who benefit from cheaper imports. As the Aluminium Secondary Producers Association (ASMA) shows, far from damaging trade, imports actually benefit Indian producers who can exploit new opportunities to export metal products to countries where premiums are higher. ASMA points to the fact that Indian manufacturers have discovered that it’s actually more lucrative to sell the primary metal abroad than to service the domestic market. Figures show that exports have been rising year-on-year, and some smelters have been reaping huge profits as a result.
It’s estimated that if the additional duties pass, the 2.5 million jobs of the downstream sector would be at risk – hardly good news. The threat from the fact that these protective measures will restrict the availability of cheaper recycled aluminum which is essential to so many industries, forcing them to depend on high-cost domestic aluminum which simply can’t meet manufacturers’ rising requirements.
Indeed, by ring-fencing the dominance of the three actors making up India’s primary aluminum industry, the Commerce Ministry risks eroding the profitability of a large number of smaller enterprises who contribute more overall to the economy in terms of income and employment. Current projections indicate that the country’s aluminum demand will reach more than 7 million tonnes by 2023, up from 3.6 million tonnes in 2018. An artificially high customs duty will only serve to constrain manufacturing, undermining the competitiveness of its downstream businesses. The greatest opportunities for growth and employment in the sector lie not in its primary producers but in the development of end products like castings, extrusions, and fabrication.
New Delhi would be well advised to listen to the country’s manufacturing base and keep the Indian market open to international trade. Not would only be closing it to foreign metal critically affect production in various strategically important industries, but it would affect employment and the long-term growth trajectory as well. Rather than undermining the successes of the Make in India the Commerce Ministry should bet on economic openness than on sacrificing economic prosperity of the many for a few companies’ privileged demands.