Talk Global And Act Local: The Budget’s Not-So-Subtle ‘Make In India’ Push

Much of the world, including China, applauded enthusiastically as Prime Minister Narendra Modi strongly batted for globalisation at the Davos Summit last week, and as he called protectionist policies ‘as dangerous as terrorism’ to the new world order. Modi’s statement, the keynote at the summit, was praised by most - and also ridiculed by some - coming at a time when the fears of an increasingly isolationist United States threatens to destabilise global economic growth.

While the Prime Minister may have extolled the virtues of free trade and launched a broadside against 'protectionism', his government’s stance in the Budget was different. India's Union Budget, presented yesterday (1 February) by the country's Finance Minister (FM) Arun Jaitley, revealed a calm determination towards strengthening local manufacturing, with a dose of what many can claim to be protectionism on part of the government.

India is being damaged by trade competition from China. Even as Prime Minister Narendra Modi has been promoting Make in India, India’s trade deficit with China has exploded. It now accounts for about 36 per cent of India’s total trade deficit even though China accounts for only about 10 per cent of India’s total trade.

To China, we export iron ores, granite, aluminium, refined copper, raw cotton amongst other commodities – totalling to about $10 billion. And yet, we import roughly six times the amount. This includes virtually all manners of phones and electronics, solar panels, specialised steel amongst other manufactured goods. A lot of these goods are manufactured using Indian raw materials exported to China. Out of the total trade of approximately $70 billion, India runs a deficit of $50 billion dollars. India’s smartphone, renewable energy and construction growth story is paying the Chinese working class for its success.

Worse still, India’s exports to China are biased toward raw materials whereas it imports manufactured products. This should not come as a surprise to all those who have bought Chinese toys, dolls, Ganeshas, fireworks, and what not. Indian small-scale and light manufacturing is being gradually hollowed out by Chinese competition. Unchecked, these trends are likely to intensify in the next few years as China, grappling with chronic domestic overcapacity and a domestic debt mountain, seeks to export its way out of trouble.

It was inevitable for India’s policymakers to eventually recognise the threat of oncoming tsunami of cheap goods from the north and prepare a game-plan to deal with it.

Although the Indian government had announced it’s ‘Make In India’ programme with much fanfare when it came into power, the underlying incentive was lacking. This year’s budget remedies that. Since getting most goods and services covered under the GST regime ensured an easier taxation system for the manufacturing sector, the budget yesterday raised custom duties on imports across sectors - including electronics, footwear, ancillaries, food processing and personal care products.

As Nilesh Shah noted, "Corporate India has surplus capacities in many sectors, also in a few cases most of the value addition was happening outside India earlier. This move will signal long term players to move from a trading model to a manufacturing model. Taxation for SME (with turnover of less than ₹250crore) has also been reduced to 25%. The focus of bank lending on SMEs, as announced in the PSU recap package, will also help the smaller companies."

The custom duty on parts used for manufacturing LCDs, LEDs, OLED TVs now stands between 10-15 per cent from the earlier 7.5-10 percent range, in a move that’ll directly drive companies to consider their local manufacturing over imports.

To drive local footwear manufacturing by international brands, the duty on imported footwear has been increased from existing 10 per cent to 20 per cent. The duty on parts used for manufacturing footwear has also been increased from 10 percent to 15 percent, indicating the focus towards moving entire production to India. Automobile part imports will also invite 15 per cent duty on import, replacing the existing 7.5-10 per cent currently.

In the mobile sector, the duty now stands at 20 per cent from the earlier 15 per cent, leading to predictions that nine out of 10 phones in 2018 will be manufactured in India, reported Economic Times.

"We have doubled up our production capacity this financial year and will continue to scale up," said Sudhin Mathur, Managing Director at Motorola Mobility India.

As border skirmishes between India and China slowly become the norm of the day, India faces an imminent need to outgrow Chinese import dependence for it’s industries and also needs the local manufacturing to pick up to generate the much needed jobs it’ll create with it.

Also read:

--India’s dangerous economic dependence on China and what the former can do about it

--Trump’s trade war on China and lessons for India