If the Indian primary aluminium industry had hoped for increased tariffs on aluminium imports in the 2019 budget, it was severely disappointed. Instead, the industry took a blow even before the budgets announcement on July 5, with the stock price for major aluminium producers like Vedanta and Hindalco falling by 4.12% and 3.04% respectively. Primary producers had been pushing hard for more protection against Chinese aluminium dumping, among other things. However, the government was smart not to give in to the industrys demands, since introducing higher import tariffs on aluminium is a risky move, both from a geopolitical and economic point of view.
New Delhis decision to prioritise infrastructure and rural development over the economic interests of Indias primary aluminium producers may have been informed by an international environment increasingly critical of Indias protectionist policies. The country has been especially under pressure from the United States to open up its market, and has been labelled a high-tariff country by US-president Donald Trump for limiting foreign access to its.
For what its worth, Trump has a point: India has the highest tariffs “of any major world economy”, with an upward trend since the introduction of the ambitious 2014 Make in India initiative. Not surprisingly, things came to a head in June this year, when Trump scrapped Indias trade concessions it had enjoyed under the Generalised System of Preference (GSP) to the tune of US$5.6 billion. The benefits were rolled back from 5 June. In retaliation, the Central Board of Indirect taxes and Customs (CBIC) announced new tariffs on US products on 15 June.
The US are still fuming over this move, and it is obvious that adding even more trade barriers in the form of higher aluminium tariffs would only have added fuel to the already raging fire. Industry actors have been running a sustained campaign to increase the tariffs on aluminium scrap and primary aluminium of 2.5% and 7.5% to 10% for a long time. That their voices have not swayed Finance Minister Nirmala Sitharaman is positive for Indias economy. After all, the aluminium tariffs demanded by the countrys primary producers are a principal example of the adverse impact they have at home particularly in the downstream aluminium sector.
A key aspect of the Make in India plan was an import duty hike designed to insulate domestic steel and aluminium markets from foreign competition, since both were defined as strategically important sectors. Like today, steel and primary aluminium producers argued that the influx of cheap Chinese raw and scrap metal was killing off the domestic industries. Unlike aluminium, however, steel did eventually receive trade protection in the form of import levies of 10-20 percent. Aluminium producers have been demanding similar measures ever since.
Supporting downstream SMEs
The problem is that imposing highr import duties on aluminium would severely harm the downstream and the small-and medium-sized enterprises (SMEs) operating in it: a range of industries, such as the car sector, rely heavily on foreign-produced metals for which there is no local production capacity. Downstream aluminium consumers need foreign metal of sufficient quality to keep their production lines running. Industry groups like Aluminium Secondary Manufacturers Association (ASMA) have consequently pointed out that the duties will only favour Indias three major primary producers in India, since for them it is more lucrative to sell their products abroad at higher premiums. Not surprising that Indias aluminium exports in 2018 were up by 58 percent.
It doesnt help either that downstream manufacturers are facing a serious price disadvantage imposed by the primary producers. Primary metal producers sell their raw product at 14 percent higher than the international price defined at the London Metal Exchange (LSE), which is creating cost pressures that SMEs will be unable to bear if compounded by even more expensive aluminium imports. This makes Indias SMEs less able to compete on the international market, stifles much-needed innovation and risk thousands of jobs in the sector.
Achieving continuous growth
Given that more than 50 percent of the stakeholders in the aluminium industry at large are SMEs and ancillary producers whose needs have to be taken into account for overall economic well-being, their issues need to be taken into account as well. If India wants to achieve continuous growth on the way to becoming a 5-trillion-dollar economy, as the budget suggests, SMEs need to receive the support they need to thrive.
At a time when New Delhi is already under fire for its protectionism, it is ill-advised to respond to the criticism with even more tariffs and choking off the downstream in the process. Primary producers may have lost this battle but the war over policy is not over yet.