Finance Minister Nirmala Sitharaman has rejigged customs duty rates and indicated a further overhaul by October in a bid to boost its manufacturing sector. These follow the PKI scheme and the cut in corporate tax rates that are also designed to help position India as the world’s next factory.
When Narendra Modi swept in to power in 2014, he had said exercise cannot help a person who is not in good health. This was in response to questions about the transformative changes he had promised to the Indian economy.
Budget 2021-22 was the signal that India is now ready for measures that can transform its economy and take growth rates to a higher trajectory.
One of the major goals of the Modi government has been to increase the share of manufacturing in India’s GDP from 17-18 per cent at present to 25 per cent. Towards this end, the sharp cuts in corporate taxes to 22 per cent for existing companies and 17 per cent for new manufacturing ventures, the production-linked incentive (PLI) scheme for smartphones and 10 other sectors and the series of changes in the Budget rejigging the customs duty structure on a range of imported finished goods and inputs are all steps that are expected to encourage domestic manufacturing.
The Budget presented by Finance Minister Nirmala Sitharaman, especially the changes in import duties, was another step in putting together the jigsaw puzzle that is expected to make India a destination of choice for global manufacturers looking to de-risk their global supply chains from its current over-reliance on China.
“Our customs duty policy should have the twin objectives of promoting domestic manufacturing and helping India get onto the global value chain and export better… The thrust now has to be on easy access to raw materials and exports of value added products,” said Finance Minister Nirmala Sitharaman in her Budget speech.
The authorities are working on a plan to overhaul the customs duty structure by October this year to free it of all the distortions that make finished goods cheaper than the inputs that go into it. Towards that goal, the government is reviewing as many as 400 exemptions after eliminating 80 of them.
The idea is to levy low import duties on inputs that go into value added products and impose higher duties on finished goods to encourage Indian and foreign companies to manufacture more products in India.There is, however, a need to exercise some caution here to ensure that this policy of restructuring customs duties does not end up with India reverting to the failed import substitution policies favoured in the first four decades of Independence.
“Starting with the corporate tax reforms in September 2019, there has been a series of economic reforms, including in the 2021-22 Budget, designed to improve the productivity and competitiveness of the Indian economy, including the manufacturing sector,” Arvind Virmani, former Chief Economic Advisor to the Finance Ministry told The Economic Times recently.
Since coming to power seven years ago, the Modi government has steadily increased customs duties on products that are being made in India or those in which it wants to encourage domestic manufacturing. In fact, Basic customs duty (BCD) rates have been raised for 4,000 items over the last six years.
In 2016, Arun Jaitley had removed BCD exemption for chargers, adapters, batteries, wired headsets and speakers in order to encourage domestic manufacturing.
The Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement also follows this philosophy by rejigging customs duty rates to improve India’s manufacturing competitiveness and provide incentives for local value addition under the Make in India programme.
However, higher taxes must have a sunset clause, otherwise they will encourage globally uncompetitive businesses to thrive behind tariff walls, as they did in the first four decades after Indian Independence.
“Domestic electronics manufacturing has grown rapidly. We are now exporting items like mobile phones and chargers. For greater domestic value addition, we are withdrawing a few exemptions on parts of chargers and sub-parts of mobiles. Further, some parts of mobiles will move from nil rate to a moderate 2.5 per cent (customs duty),” said Sitharaman.
The customs duty reforms carried out in the Budget and the ones proposed in the months ahead must be seen in the context of two other major reforms carried out by the government – the cut in corporate tax rates referred to by Virmani and the PLI scheme.
The latter aims to give companies incentives on incremental sales of products manufactured in India. The idea is to invite foreign companies, especially those looking for alternatives to China, to set units in India. The PLI scheme also aims to encourage local companies to set up or expand their existing manufacturing units.
The initiative has already met with success in the smartphones segment, with companies such as Apple, via its contract manufacturers Foxconn, Pegatron and Wistron, Samsung and some Indian smartphone makers, setting up or planning to set up new facilities here.
In fact, as many as 22 companies, including the Austria-based AT&S and China-based Avary (printed circuit boards), Israel-based Neolync (actives), Germany’s Vitesco (power electronics sensors), Taiwanese firm Walsin (passives) and US-based Visicon (assembly, testing, marking, and packaging}, have invested in India in response to the government’s $6.6-billion PLI scheme.
Several Indian companies such as contract manufacturer Dixon, mobile phone makers Micromax and Lava and others like Padget, Optiemus and Sojo, have also decided to move part of their production lines from China to India.
The scheme is expected to increase the proportion of value addition for smartphones in India to 35-40 per cent from 15-20 per cent now. Thus, it will help India achieve its ambition of emerging as a major global smartphone manufacturing hub, a huge improvement from its current status as a major assembler of components imported from other countries, mainly China.
Following the success of this scheme, the government is rolling out similar PLI schemes to support domestic manufacturing in sectors such as textiles, batteries, solar power equipment, active pharmaceutical ingredients, air-conditioners, LED bulbs, medical devices, etc.
“We are quite hopeful that before end of this financial year (on March 31, 2021), all PLI schemes would have received cabinet approval and would be notified. We have done extensive stakeholder consultations with air-conditioner and LED players,” said Guruprasad Mohapatra, Secretary, Department for Promotion of Industry and Internal Trade (DPIIT).
The thrust on manufacturing was kicked off in September 2019 when Sitharaman unexpectedly slashed corporate tax rates from 30 per cent plus surcharges to 22 per cent for existing companies and from 25 per cent to 17 per cent for new manufacturing firms to make Indian tax rates competitive vis-à-vis those in its Asian peers.
“The step to cut corporate tax is historic. It will give a great stimulus to #MakeInIndia, attract private investment from across the globe, improve competitiveness of our private sector, create more jobs and result in a win-win for 1.3 billion Indians,” Modi said on Twitter soon after the announcement.
Together, these measures are expected to help expand the manufacturing sector in India by attracting several foreign companies to invest in new facilities here.