Sunday, October 19, 2014


While I was in the finance ministry, many industrialists used to come to lobby me. Some continued to visit me after I left the ministry and joined the press, in the hope that I would write in their favour. I am a liberal and a believer in unilateral free trade; so I generally disappointed them. But I made an exception in favour of alkali manufacturers, because their overseas supplier was a monopolist and was practising price discrimination.


Recently I had unlikely visitors - from the Alkali Manufacturers’ Association of India (AMAI). They want higher protection. I told them they had lost their way - that the North Block was a couple of miles south of where I was. They could be sure of getting a warmer protection in that edifice, for it housed a business that converted protection to industry into support for the ruling party.
Anyway, AMAI insisted that they had not lost their way, that I was the person they wanted to educate. First, the story they are telling the finance ministry. They say that they do not want tariff protection; they want tariff correction. Why? Because they are an industry the government should value. They have invested Rs 45 billion in the industry, they sell soda ash worth Rs 20 billion a year, and they pay Rs 4 billion in taxes - excise, sales tax, cess on salt, limestone etc. The duty on soda ash used to be 40 per cent. Chidambaram reduced the maximum customs duty to 35 per cent. Then Yashwant Sinha reduced it to 20 per cent last year.
The rest is familiar spiel. If the duty is not raised, the soda ash industry will be wiped out. With it, half of the demand for salt will vanish. The livelihood of 450,000 families - 2 million people - will be destroyed. Of these, 95 per cent will be Gujaratis, for that is where the salt industry is concentrated.
Soda ash is used in the making of glass, soap, detergents and dyes. None of these industries is complaining. But AMAI says they have not reduced their prices even though they could get cheaper soda ash from abroad during the past year. So they may have made bigger profits, but their consumers have not benefited (but no prices of these products are given). AMAI gives figures to show that production plus imports have exceeded domestic demand every year. That should mean that someone has been building up stocks - over a million tons since 1994-95 - equal to over six months’ production. AMAI does not say which idiot did it and why, at a time when soda ash prices rose little. Which makes me think these figures are phony - that like the figures Sebi puts out, they do not mean what they are said to mean.
These arguments and supporting figures are not enough to change my general view, to which I will come later. What caught my interest, however, was something else. The finance minister, in his budget speech last year, said, “There are some cases of anomaly in customs duty between raw materials and intermediate goods on the one hand, and intermediate goods and final products on the other....soda ash is an input for the production of glassware, detergents etc and currently attracts the peak customs duty of 35 per cent along with the final products. I propose to reduce it to 20 per cent.” In other words, soda ash bore the same duty as the products made from it, and he reduced duty on it. To eliminate an anomaly? But there was no anomaly; even if the duty on an intermediate and its product is the same, the product gets protection equal to the duty on its value added. The finance minister either did not know economics, or fudged facts, or both.
And why did he do so? A possible pointer is to be found in a letter written by William Daley, US Commerce Secretary and Charlene Barshefsky, US Trade Representative, to Murasoli Maran on 28 January 2000. There they expressed “our concern over what has become a de facto embargo established by your government since 1996 under a temporary injunction imposed by the Monopolies and Restrictive Practices Commission (MRTPC).”
They said that India’s 38.5 per cent tariff was the highest in the world and, together with other import fees, yielded an unacceptable 69.9 per cent burden on US soda ash exports. They had received a petition from John Andrews, President of ANSAC, asking them to withdraw the preferential treatment to $1 billion of India’s exports to the US given under the Generalized System of Preferences if India did not reduce the duty on caustic soda.
What was this de facto embargo? AMAI went to MRTPC in 1996 and said that ANSAC was a cartel of American soda ash producers who were exporting to different countries at different prices calculated to destroy the soda ash industries of those countries. It gave figures purporting to show that ANSAC’s export prices to countries that had a soda ash industry were lower than to those that did not have one. So MRTPC imposed an embargo on ANSAC’s exports to India. The abolition of import licensing last year abrogated that embargo.
In sum, the industry’s case is that ANSAC is a cartel that aims to destroy the Indian soda ash industry and establish an import monopoly. The NDA government, which is usually so kind to indigenous industry, still reduced customs duty on soda ash to 20 per cent. It did so under US threat - that it would withdraw preferences on $1.1 billion of India’s exports unless India was kinder to ANSAC.
But why is ANSAC exporting to India at prices far below the Indian industry’s cost of production? Not because it is a cartel, but because its cost of production is less than half of Indian cost. For huge hoards of soda ash are found naturally in Wyoming; American producers have simply to mine them and ship them. Whereas the Indian producers have to produce salt, and then turn it into soda ash by electrolysis.
So - what should be done? The first part of my answer is the same as before. It is the job of the government to ensure a rapid growth in total output and employment, not to protect any particular industry; if the threat to an industry poses severe regional problems, the industry should be subsidized to adapt itself, or the region subsidized to grow new industries. So the government should abolish all tariffs and devalue to give equivalent protection. AMAI’s complaint of high domestic costs is valid; railways need to reduce their costs, roads need to be improved and a competitive market for power needs to be created to reduce power costs. With these steps and a subsidy for modernization, the soda ash industry could certainly survive. If it cannot, so much the worse for it.

But there is a second part - that if it is established that ANSAC charges different countries different prices, then remedies against exercise of such price discrimination are necessary. The ideal would be international action against such monopolies under the WTO. If that is not possible, then there is a case for an import duty equal to the difference between ANSAC’s export price to India and the highest export price it charges.