How does a nation letting imports of major and essential items in perpetuity have a distorted priority for genuine industrial development and expect growth?
The grim geopolitical ramifications of the second innings of the President Donald Trump of the United States since last year appear to be unending, beginning with the tariff tantrums he defiantly threw last April till the ongoing imbroglio in the Strait of Hormuz in the wake of the Iran-Israel conflict with the US backing Tel Aviv to the hilt. As India began its new fiscal year on April 1, having passed the current fiscal year budget last month in post-haste with Opposition parties holding the Treasury Benches on a tight leash by their determined disruptive tactics, the portents for the economy do not look anywhere bright!
India’s growing reliance of fuel and fertilizers imports as also for inputs and intermediates to building its domestic manufacturing mojo continue as ever and forever, albeit the avalanche of fillips such as Make in India (2014!), Aatma Nirbhar Bharat initiative (2020) and Production Linked Initiatives in key sectors including textiles and electronics, had only intensified in volume and increased in value over the years. Whatever justification one may trot out in defense of the incentives to industrialise on a faster clip, the incontrovertible fact remains that our import appanage appears to have entrenched unfortunately. Add to this, there is only a perfunctory effort to reduce, if not remove, the extant inverted duty structure in which intermediate goods confront higher tariffs than finished goods. This only exacerbates the insipid industrial investment by private sector, as the latter finds enterprising traders import profitable to what could be churned out domestically for sale! How does a nation letting imports of major and essential items in perpetuity have a distorted priority for genuine industrial development and expect growth? It is hard to decipher.
The latest announcement by the government that a one-time relief measure for units operating in the Special Economic Zones (SEZs) pan-India to sell goods domestically at a lower customs duty for one year in the face of ongoing global uncertainty has aggravated the concerns of the domestic manufacturing sector. A notification by the Ministry of Finance said the overall Customs duties pruned, including basic customs duty, Agriculture Infrastructure and Development Cess and health cess range from 6.5 to 20 percent. Not surprisingly, domestic manufacturers feebly cry that the reduced duty still makes them uncompetitive vis-à-vis the import of similar goods in domestic tariff area (DTA) from the FTA partner countries where zero or nominal duty is applicable!
It is against this development; the ongoing war affecting the Strait of Hormuz region is throwing off kelter energy and fertilizer flows, with visible impact on costs and burgeoning risks for food system, trade, and vulnerable economies. The United Nations Conference on Trade and Development (UNCTAD), the proverbial ally to the Global South, said in a latest newsletter that this “critical artery for global energy and fertilizer trade, carrying around a quarter of seaborne oil as well as significant volumes of liquefied natural gas (LNG) and fertilizers”, saw shipping activity through the Strait has fallen precipitously. Daily transits dropped from an average of 103 vessels including large oil tankers in the last week of February to single digits within weeks, “effectively bringing flows close to a standstill”.
Without mincing words, the UN body warned that for importing nations particularly in Asia and that includes India, heavily dependent on imported fuel and fertilizers to keep its industrial and agrarian economy in operational mode, ‘disruptions to energy and fertilizer flows are closely linked as reduced access to natural gas and higher costs could hit fertilizer output, availability and trade’. For India priding on its growing power as major agricultural product exporter along with Brazil, their heavy and growing reliance on fertilizers imports, linking input markets directly to global food supply has not come a day too soon. In many emerging economies like India and developing ones like Sudan, the United Republic of Tanzania and Somalia, fertilizer access is equally critical for staple food production and to keep the vast network of the domestic public distribution system functioning sans hassles.
The government has no doubt made efforts on a war footing to assuage the concerns of people through direct intervention measures, as it had done in reducing excise duty on fuel and keeping the fertilizer distribution network delivering to the last-mile consumer, but the question is how long and at what cost if the situation is not restored fast in the choked supply region in the Gulf.
It is not without reason that United Nations Conference on Trade and Development (UNCTAD) worries that this reliance with limited capacity to absorb price increases or secure alternative supplies at plausible cost, given the fact that import-dependent economies face “tight fiscal space, external imbalances and constrained access to finance, reducing their ability to respond to rising costs.” Though India is not in such a tough situation, it needs to reckon that freight rates for oil tankers had risen by more than 90 percent since February with a few insurers recanting coverage insurance cover altogether for vessels operating in the Persian Gulf.
No doubt, the scale of damage of the deleterious effects would hinge on how long disruptions persist even as the extant trends point to escalating pressure across commodity markets and supply chains, policy wonks plaintively say.
(G Srinivasan is a senior economic journalist based in New Delhi)
