Last year, Varun Mittal, a Ludhiana-based manufacturer of knitted goods, observed an unusual trend in import of a key raw material (a fabric item) just after the government imposed anti-dumping duty on it to discourage imports. The import of this polyester component - trade items are identified by a globally recognised, harmonised system of nomenclature code (HSN Code or simply tariff code) - fell 99 per cent. But import under another tariff code, specified for a slightly different type of fabric item, went up by almost the same amount. "There are more than 400 HSN codes that deal with fabric. Each number has different rates. If you persuade the government to impose anti-dumping duty on some, the trade shifts to other tariff lines," says Mittal.
This is important as India has been increasingly using 'tariffs' to protect domestic industry in recent times. Its attempts are being defeated by the practice of exporters shifting from specific tariff lines to more generic categories. In fact, an unusual increase in imports under the 'others' category was one of the key problems the Narendra Modi government identified in the early days of its current tenure. "A Committee of Secretaries, set up by the prime minister, is looking into the issue. It has been observed that 78 per cent of the $18 billion (2018/19) imports (of products) that come under the administrative purview of the Ministry of Heavy Industries were in the 'others' category," says a Ministry of Commerce official. The numbers are high also for sectors such as steel, telecommunications, electronics and chemicals and petrochemicals (which covers the polyester that Mittal was talking about). Steel scrap and related products worth $4.9 billion were imported in the 'others' category in 2018/19. In telecom, the number was $13.8 billion, while in chemicals and petrochemicals, it was $9.7 billion. On the whole, 371 tariff codes, accounting for $68.8 billion of imports in the 'others' category, are under scrutiny. Anti-dumping duties are imposed for a limited period (normally five years) on imported items that are priced lower than their normal value in the exporting country to kill competition in the destination market.
India has increased customs tariffs on several products and is considering a number of cases for special anti-dumping duties over and above such normal duties. India, in fact, initiated 32 anti-dumping measures in 2018, second only to the US (41 cases) among the 164 WTO member countries. India also initiated 600 anti-dumping investigations, including 313 review cases, between January 1, 1992 and March 31, 2019. There are also other trade remedial measures that India can use like countervailing duties (subsidies and special duties to offset subsidies), safeguard duties and safeguard quantitative restrictions, apart from emergency measures to limit imports temporarily to safeguard domestic industries. But these have been used sparingly - there have been just 43 safeguard investigations and nine countervailing duties in 27 years.
Business Today has not been able to independently verify Ludhiana-based Mittal's claim, but there are enough indications to suggest that everything is not hunky-dory in India's efforts to check distortions in fair trade. Underinvoicing, misclassification, shifting of imports from countries where anti-dumping duties apply, etc., are just some of the practices that have been at the centre of attempts to dodge the goverment's efforts.
Though the primary purpose of trade remedial measures is not to generate revenue for the government but provide a level-playing field to domestic industry versus global competitors, the above mentioned measures can lead to evasion or circumvention of duties, making a loss to the exchequer. Sometimes, anti-dumping measures do not seem to be making a difference when imported raw materials are used to make goods for exports and duties paid on such inputs are reimbursed and so they do not act as a deterrent for exporters.
However, where anti-dumping duties work effectively, they can help strengthen domestic industry, as is evident from the reduction in import dependence and augmentation of domestic production capabilities in some sectors.
However, where anti-dumping duties work effectively, they can strengthen domestic industry, as is evident from the reduction in import dependence and augmentation of domestic production in some sectors. Take alloy wheels, where huge capacities came up after India imposed anti-dumping duty. Now, it is an example of India's potential as locally produced two-wheeler alloy wheels are cheaper than imported (mainly from China) wheels even without any anti-dumping duty at present.
"Today localisation in alloy wheels for two-wheelers must be to the tune of 60 per cent. We believe that in the next three years, this will be about 85 per cent. There is no anti-dumping on two-wheelers, but we have gained scale now," says Ujjwal Kant Munjal, Managing Director, Rockman Industries, India's largest alloy wheel maker for two-wheelers. Rockman has a capacity of 12.5 million such wheels per annum. "If the Chinese could do it with size and scale, we can also do it, and that's what we have done. The rest of the market put together, there are another 12 million (wheels) being manufactured in India. Scale and customer confidence is what matters," Munjal adds. Recently, the company started manufacturing allow wheels for passenger cars as well. One of the triggers was the anti-dumping duty on alloy wheels for cars.
The current capacity of Indian companies is about four million passenger four-wheeler alloy wheels a year, just a fraction of China's 120 million. But even that capacity came up only after the anti-dumping duty came into force. "Out of this four million, three million must have come up after the imposition of the duty. Once India starts producing 15-20 million wheels, we will be able to compete with them (China)," Munjal says.
This is where India needs its policies to aim at medium- and long-term goals of self-sufficiency. It's a complex game with high stakes. How well is it working?
A cursory look at import trends in the 'others' category shows that the government's fear is not misplaced. In general, there has been an increase in not only the non-specified sections of each product group ever since India started increasing customs duties but also in the frequency of anti-dumping duty investigations over the last five years. The trend is consistent for both volume and value of imports.
"In every product group, one tariff line is the 'others' category, where imports are seeing a sharp increase. When it happens in products that carry a minimum import duty, as in case of steel, or anti-dumping duty, as in case of several chemicals, the decrease in imports of the targeted tariff line matches the increase in the 'others' category of the same product," says Murali Kallummal, Professor, Centre for Research on International Trade, Indian Institute of Foreign Trade, New Delhi.
While one may not be able to point out a single reason for this trend in imports, there is a strong possibility that products with high duties find their way into India through the 'others' category, thereby diluting the impact of fair trade measures. Therefore, there is a need to revamp the existing trade classifications for better transparency. "The HSN system (tariff codes) should be more disaggregated to handle this. We have to make products as disaggregated as possible, and preferably (named or classified) as used by the industry," says Kallummal.
Ludhiana's Mittal has some tips for the government in this regard. "Tariff is the biggest area for the government to get into. In textiles, for instance, knit fabric comes under one definition, but you can produce knit fabric at Rs 220 a kg and also Rs 780 a kg. The gap is huge. So, evasion happens not only on the basis of rate and quantity but also quality." According to him, there should be a mechanism under which goods from a foreign country show their right value in the originating country. "Future free trade agreements should make it mandatory for the exporting country's shipping bill to carry the cargo value. In that country, all the benefits given on exports should be based on the value of that shipping bill and not the invoice. If the value of the cargo is mentioned on the shipping bill and the same is used by the exporting country to reimburse taxes and the importing country to levy import duties, the problem will be solved," says Mittal. He adds that an international e-way bill like the one India has can ensure fair trade and trade data at the same time.
Cause and Effect
A.K. Gupta, Founder, TPM Solicitors and Consultants, which handles close to 85 per cent of all anti-dumping cases on behalf of the domestic industries in India, says a quick analysis of 25 products where anti-dumping duties had expired till the end of 2019 shows mixed results. "In several cases, the performance of the industry improved as a result of the duties, due to which the DGTR (Directorate General of Trade Remedies, under the Ministry of Commerce) found it appropriate not to continue the duties. In some such cases, the domestic industries have been forced to file fresh applications as imports increased significantly post the expiry of the duties. For example, in case of nylon filament yarn, the expiry of the duty led to increased imports at dumped prices, affecting the industry," Gupta says.
In fact, of all the 25 cases, at least 10 proved to be tough nuts to crack because despite duties, the sectors continued to be hit by the imports. These included aluminium road wheels, electrical insulators, nonylphenol, hexamine, acetone, and mostly products in the chemicals and petrochemicals category. In some cases, sunset reviews (SSR) to continue or increase the rate of anti-dumping duties were initiated, too. An SSR led to duty enhancement and extension for Meta Phenylene Diamine, but in the case of some rubber chemicals, the duty was not continued and imports increased once it expired in early-2019.
Dumping of electrical insulators continued, but for a different reason. After the anti-dumping duty was imposed, Chinese producers started exporting polymer insulators, instead of glass and porcelain insulators, on which there was anti-dumping duty. The performance of the domestic industry improved for some time but gradually deteriorated when glass and porcelain insulators were replaced with polymer insulators.
There are success stories, too. The domestic makers of sodium nitrate made no request for extending anti-dumping duty on the product which is imported from the EU, China, Ukraine and South Korea. The duty imposed had restored the level-playing field for them. Gupta's analysis also shows that anti-dumping duty was effective in case of steel wheels and a chemical and petrochemical product, 4,4 Diamino Stilbene 2,2 Disulphonic Acid.
In some cases, the domestic industry wants the anti-dumping duty to stay as gaining scale and strength against cheap imports takes time. This has resulted in an increase in the number of appeals for reviewing the sunset clause. "In 2018/19, a number of investigations were terminated without recommending any additional duty.
This was especially true in case of sunset reviews, in cases where investigations were not initiated or were terminated if the performance of the industry had improved. But the authority should have examined if the performance would deteriorate in the absence of the duty. Since such industries felt that the duties should have been imposed or continued, it led to a number of findings being challenged," says Gupta.
When a duty is imposed on a product, there can be various consequences - import from the very same sources may change, import of the same product from other countries may change, and import of downstream and upstream products could also be impacted. All four possible scenarios need to be carefully tracked to understand the dynamics of the trade flow in the anti-dumping context.
With India keen to discourage non-essential imports, understanding these factors can only help frame regulations that are more effective and can strengthen domestic manufacturing.
The Committee of Secretaries, meanwhile, is trying to formulate a strategy to control the import of products in the 'others' category. Commerce Minister Piyush Goyal is known to have asked the ministries with a high burden of such unspecified imports to identify at least 300 products, to begin with, to reduce the country's import dependence while promoting local manufacturing. A March 2020 deadline is also in place.
Unless the government finds a magic wand, ensuring effectiveness of trade remedial measures will remain a complex and critical problem.