Context: In the upcoming Union Budget, the Central government is likely to review import barriers that currently ‘protect’ large domestic players. Various import restrictions – tariff and non-tariff – have led to market concentration and increased costs for downstream users across sectors. This has disproportionately impacted the Micro and Small & Medium Enterprises (MSMEs).
Relevance of the Topic: Mains: MSMEs: Challenges, Policy Recommendations
Impact of Import Restrictions on MSMEs:
1. Rising costs & favouring Select Players
- Example of Solar Panel Industry: The Ministry of New and Renewable Energy mandates solar projects to source modules exclusively from a government-approved list of domestic manufacturers starting April 1, 2024.
- It has benefitted domestic manufactures by excessive profiteering.
- On the other hand the small manufacturers are impacted due to expensive domestic modules, and have potential to inflate household electricity tariffs for downstream users.
2. Impact of Quality Control Orders
- Between 2021 and 2023, the government brought in quality control orders (QCOs) on polyester and viscose fibres (key inputs for synthetic textiles), effectively restricting imports.
- QCOs has led to disruption of supply-chain and costlier domestic alternatives for MSMEs.
- This has led to inflated input costs and supply shortages persist for smaller MSMEs, while big companies like Grasim Industries and Reliance Industries benefit.
3. Strengthening Monopolies at the Expense of Smaller Players
- A rise in QCOs, tariffs, and other trade barriers on key raw materials (E.g., steel, copper, aluminium, and polymers) aimed to protect the domestic industry from external competition is turning counter-productive.
- The use of tariff and non-tariff barriers like QCOs on the import of critical raw materials is creating an uncompetitive environment for Indian industries, particularly MSMEs. Now, MSMEs are pushing back against such protectionist measures.
4. Domino effect on Downstream Industries
- Safeguard duty policies might give a fillip to the domestic steel industry. But they also raise the price of steel, which undermines the pace of expansion of railways and hurts the consumers of products using steel, such as kitchen utensils, cutlery, refrigerators, bicycles, motorcycles, farm machinery, and automobiles.
- The higher costs also lead to job losses in these products.
Other Concerns Regarding Import Restrictions:
- MSMEs kept out of consultations:
- MSMEs are not being invited to the import duty consultations.
- For instance, a duty hike in steel imports will hurt the downstream industry. If protection is provided for steel producers, there must be protection for MSMEs too.
- Threat of Chinese dumping:
- There is merit in the safeguard duty request as globally there is a push back against Chinese steel.
- The European Union has been blocking imports for the last 8 years, the US has imposed restrictions. So, there is a case of trade diversion to India.
Policy Recommendations
- Comprehensive review of customs duty rates:
- rationalise and simplify it for ease of trade
- removal of duty inversion
- reduction of disputes
- Selective Reduction of Tariffs: Lowering import duties on specific raw materials and components crucial for MSME production to reduce costs.
- Reevaluation of QCOs: Assessing and potentially relaxing certain Quality Control Orders that may be unnecessarily stringent for MSMEs without compromising product safety and standards.
- Caution against High tariffs and Trade barriers:
- Government initiatives should not close off imports to the point where India starts “cultivating local monopolies”.
- An economy gains more from its imports than it gains from the exports because imports are what provide competition.