Manufacturing strategy needs to be synchronised with phasing out of under-invoiced imports from China
Most countries are critical of China’s approach to trade and investment. The 145th Report of the Parliamentary Standing Committee on Commerce, July 2018, is critical of the impact of massive Chinese import through unscrupulous means (under-invoicing/misdeclaration/smuggling, selling of substandard/counterfeits/rejects and routing export through FTA countries).
The Report of Directorate of Revenue Intelligence (2015) to the Supreme Court-appointed SIT on black money has alleged massive under-invoicing (prices lower than even basic manufacturing cost) of Chinese imports. Over the last 10-15 years, massive inflow of cheap Chinese imports have made our manufacturing uncompetitive.
The Chinese ‘deluge’
The removal of quantitative restrictions in 2001, decline in weighted average basic import duty rates (22 per cent in FY 2003 to 9 per cent in FY 2008) and the steady appreciation of rupee have spurred imports from China. It surged at a CAGR of 52 per cent during FY 2004-08.
The trade deficit with China was 40 per cent of the total deficit in FY 2018. Chinese imports in dollar terms (without accounting for under-declared value of imports) multiplied by 68 times with a CAGR of 23.5 per cent over 1998-2018 period. Their share in non-oil imports increased from 3.4 per cent in FY 1998 to 21.4 per cent in FY 2018.
Massive Chinese imports have undermined capacity utilisation, technological advancement and dented capex. Markets for electronics, electrical goods, solar panels, chemicals, bulk drugs, metals, furniture, many household/gifts items, toys, footwear, hardware, tiles, automobile components, tyres, bicycle parts, bearings, and machinery are dominated by Chinese products. Make-in-India is swamped by Made-in-China.
Chinese imports have led to the closure of many businesses, switching from manufacturing to trading and over-dependence on Chinese inputs.
The spread of banking, digital payments, financial inclusion drive, opening of Jan Dhan accounts were expected to improve the GDP to currency with public (CWP) ratio. However, it steadily declined from 11.26 in 1990s to 9.65 in 2000s and further to 9.25 during 2011-16. This ratio was stable at around 11.5 during entire 1985-00 period. It shows significant decline in later years coinciding with a surge in under-invoiced/smuggled Chinese imports. Concomitantly, the share of high-denomination notes (500 and 1000 notes) in CWP steadily increased from 27 per cent in FY 2001 to 70 per cent in FY 2008 and further to 87 per cent by October 2016. Despite greater formalisation of the economy following demonetisation and GST, CWP now exceeds pre-demonetisation level. Reportedly, high-denomination notes are not returning to banks. All these, imply the use of larger volume of cash to finance huge unscrupulous import from China.
Export subsidies (17 per cent — as per the 145th Parliamentary Committee Report), economies of scale, flexibility in production of goods as per importers’ specifications in terms of quality, price, counterfeits, under/mis-invoicing create unequal competition for domestic industries versus Chinese import. Connivance among exporters, importers, clearing agents, brokers and customs aid and abet this. Even small businesses have found it easy to import Chinese goods thanks to the network of Indian brokers in India, China, Hong Kong and the convenience of hawala payments.
The remedial measures
There is an urgent need to address the issue of Chinese imports. Dismantling of the shady importing nexus, random and surprise check of imports at ports in terms of invoice prices/description of goods and their actual/reference prices in the national/international markets, fixing of minimum import prices wherever possible, blacklisting and taking punitive actions against importers/exporters/clearing agents/customs involve in dubious imports etc. are some of the steps the government must take.
International cooperation in sharing information on illegal money transfers by banks in hawala-heavens like Hong Kong, Dubai can be useful in fixing accountability of such banks. Scrutiny of GST and e-way bills relating to imported items can help in detecting malfeasance.
The tax authorities can track the sale prices of imported items in the trade chain with the help of the goods and services tax network/market survey and check if an importer has underdeclared prices. However, we have to take well calibrated measures without creating sudden and large disruptions as many industries are dependent on import of raw material and components from China.
We can first begin with inessential and consumption imports. The Make in India strategy needs to be synchronised with planned phasing out of illegal/under-invoiced imports and spurring domestic capex and capacity.
The writer is former DGM of SIDBI