In the past decade, the Indian manufacturing and export industry has grown rapidly and taken major strides with the aim to become a manufacturing hub for products ranging from automobiles, pharma, and electronics. However, despite such progress, manufacturing has remained largely dependent on foreign producers for raw materials, parts, and consumables such as Active Pharmaceutical Ingredients, spare parts, semiconductors, yarn, and more. This is the reason why last year’s Covid-induced disruptions in the international supply chain also brought the Indian manufacturing industry to a grinding halt.
The automobile and electronic sector is still struggling with a shortage of semiconductors, which had resulted in a de-acceleration in production in the last quarter. This underscores the need for self-sustenance in the manufacturing sector by creating capabilities for producing raw materials, consumables, and intermediate goods.
To push the agenda for domestic manufacturing, Finance Minister Nirmala Sitharaman announced in the 2022 Union Budget speech the withdrawal of customs exemption on over 350 tariff items, which are mostly raw materials and consumables used in the manufacture of final goods. This announcement was overdue as it was signalled in her last Budget. The 2021 Budget had proposed a comprehensive review of the customs exemption notifications to be undertaken through stakeholder consultations.
To further it, the Narendra Modi government conducted a crowdsourcing exercise to identify the customs duty exceptions and listed notifications to invite stakeholder views. The 2022 Budget proposals on these exemptions are keeping in mind such crowdsourcing exercises and industry suggestions. The consultative approach is a welcome measure and a unique step in India’s evolving Budget framework.
Impetus for domestic manufacturing
The theme of these changes in the customs tariff and revisiting the entire customs duty exemption framework is to provide an impetus for domestic manufacturing of raw materials and consumables in line with the Modi government’s flagship schemes such as the Make In India initiative and Production Linked Incentive (PLI). It is anticipated that the increased tariff on the inputs would nudge the domestic industry to manufacture the goods in India and discourage imports.
To illustrate, the customs duty exemption has been withdrawn on raw materials and consumables used in garments and textiles such as spindles, yarn guides, and control rings. In addition, all intermediate and raw material-related exemptions are examined from the standpoint of their usefulness for domestic manufacturing and proposed to be phased out in a gradual manner. All final product-related exemptions are also either pruned or omitted as per the Budget proposals.
Further, concessional duties on the raw material that goes into the manufacturing of intermediate products are provided to boost domestic manufacturing of intermediate products — a concessional rate of duty has been prescribed for components of transformers of mobile phone chargers and camera lenses of mobile camera modules.
Thrust to India’s domestic manufacturing
The idea behind such changes is to lend a holistic thrust to the domestic manufacturing industry. The entire Project Imports Scheme and capital goods-related framework will stand revamped. It was reiterated in the Budget speech that exemptions on capital goods have hindered the growth of the domestic capital goods sector. Further, Project Imports-related exemptions have deprived the local producers of a level playing field, highlighting areas such as coal mining projects, power generation, and metro projects.
These Project Imports exemptions are unique for India, which were meant to grant exemption to all inputs and capital goods for large infra projects. The government has adopted a policy of reasonable tariffs pegged at 7.5 per cent, which is conducive to the growth of the domestic industry. It is proposed that the concessional rates on capital goods and Project Imports shall be phased out gradually to avoid reactive mode and allow time to avail exemptions for existing projects.
This is a crucial change because the Project Imports and capital goods exemptions are closely linked with the concessional framework under the Foreign Trade Policy. Therefore, any modification in the customs regime also implies an imminent change in the Foreign Trade Policy, which is expected to be unveiled in the next few months. This change must also be linked to replacing the current Special Economic Zones Act, 2005, announced as part of the Budget proposals. This implies that the new law is expected to be more on the regulatory side with less fiscal benefits compared to the SEZ Act.
Time to tilt the balance in India’s favour
Such large-scale changes indicate India’s willingness and resolve to promote domestic manufacturing. They send a firm signal that India is willing to take drastic measures to tilt the balance of international trade in its favour. It is noteworthy that a special regime has been conceived for the textile, chemical and metals sectors, wherein the exemption on items that are already manufactured or can be manufactured in India are removed. To illustrate, the customs duty on certain chemicals — methanol, acetic acid used in petroleum refining — are being reduced. At the same time, customs duty on sodium cyanide, for which adequate domestic capacity exists, has been increased.
The changes proposed are wide-ranging and likely to create an impact to propel domestic manufacturing. With a long-standing goal to achieve self-reliance in manufacturing, the policy seems to progressively reduce the import of consumables and raw materials with a thrust on Micro, Small and Medium Enterprises (MSMEs). An increase in import duty on umbrellas with the corresponding withdrawal of exemption to parts of umbrellas is one such step.
The proposed changes assume significance as they have moved away from cherry-picking industries and instead, making it all-pervasive. Holistic changes in the customs tariff with a clear direction to pivot the economy toward self-reliance and self-sustenance is emerging as an overarching goal.
The authors are Mukesh Butani, Managing Partner and Shankey Agrawal, Principal Associate, BMR Legal Advocates and views are personal.