Growing concern for domestic manufacturers

Traditionally, international trade is meant to promote business and cooperation between nations. It has helped countries to excel in the resources they are rich in and allowed access to key markets. However, India’s FTA with Korea & Japan has recently been in limelight since it has deeply affected the domestic manufacturers.

India in a move to strengthen trade & economic relationship with East Asian economies signed an FTA with Korea in 2009 and with Japan in 2011. Under this agreement, duties paid on import of finished Steel products from these countries are allowed a waiver of 5%.  Import duty on goods imported from these two countries is 2.5% compared to the usual duty of 7.5%. This exemption has led to a surge in volume of imports from Korea as well as Japan.

Out of the total finished steel imported to India, Flat Steel products constitute a major share. The numbers reveal that import of Flat Steel products like HR Coils, Sheets & CR Coils have increased significantly from Korea & Japan. It is estimated that in Apr’14 & May’14, import of Steel products to India was worth close to USD 1,709 million. Imports from Japan & Korea together were valued at USD 390 million.

Imports from Korea & Japan 

Trade analysts argue that such trade pact improves cooperation between nations and optimizes flow of resources which is good for the manufacturing industry. Many such FTAs around the world have been quite successful in the past as compared to the WTO negotiations. However, industry experts believe that India’s Comprehensive Economic Partnership Agreement (CEPA) with Korea & Japan is skewed in favor of these countries, which give them undue advantage, simultaneously affecting the Indian Steel industry. The Steel Ministry in its proposals has highlighted these concerns and has proposed to put Steel in the negative list of trade items. Steel as a product is an essential contributor to the GDP of the country and protecting this industry is a priority for any policy maker.

flat

Lower Financing Cost in Korea & Japan

One of the core logic which industry lobbyists argue is that in India, the input costs involved in manufacturing Steel are quite high as compared to these countries. For example, the prime lending rate prevailing in Korea is around 5.76% and in Japan it is 1.5%. Whereas in India, it’s 10.17%. The cost of capital is cheaper in Korea & Japan. Whereas, Indian Steelmakers don’t enjoy this benefit. Similarly, access to raw material also plays an important role in determining the price of finished products. The concerns faced by the domestic mining industry have added on to the cost of Steel manufacturers, thereby reducing their realizations. Steelmakers in India are therefore vulnerable to this unfair competition.

A study by the commerce ministry has revealed that India’s FTA has not been beneficial in many aspects. Tariff reductions have affected domestic industry, but it has not given any significant benefits to India. In fact, the Department of Industrial Policy & Promotion (DIPP) has suggested not signing any such agreements in the future.

Trade is feasible between two countries if both mutually gain from trading with each other. Industry bodies are demanding to relook and review our FTAs with Korea & Japan in order to protect the domestic industry from perishing. Policy makers need to be reasonable in drafting trade policies which give a level playing field for both the stakeholders.