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.
SOME UNCOMFORTABLE FACTS OF LIFE
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.
