Import levy will hurt foreign investment, joint ventures
Rajesh Ramachandran in New Delhi
The swadeshi Budget's protectionist measures might put a
dampener on foreign investors's plans for the future.
The most damaging proposal in the Budget which could adversely affect
the foreign investor is the across-the-board eight per cent hike in import duty.
This swadeshi (economic nationalism) measure in clamping a levy on imports has made the country one of the most protected economies and the least foreign investor-friendly among the growing economies of Asia.
The additional customs duty will hit the foreign direct investor badly as most of the foreign direct investments -- FDI -- have huge import components in their investment. It will also hurt joint ventures that are dependent on imports.
R C Bhargava, former managing director of Maruti Udyog Limited, told Rediff On The NeT that the automobile industry would be severely hit by the import levy.
"All automobile manufacturers would be affected, and foreign investors who import most of their components would be the worst hit. Maybe Maruti, Telco, and the older car manufacturers would not be so badly hit because most of their components are made in the country. But new foreign investors who have set shop in the country recently will have a difficult time," says Bhargava, who is Suzuki's nominee on the Maruti board.
Automobile manufacturers have already hiked prices and the same can be expected from other industries that are dependent on imports for vital components.
The import levy will also impede FDI because instead of boosting the domestic sector, which the Budget intends, the levy will cause prices to rise, further affecting demand. Moreover, no foreign direct investor can afford to avoid imports by making production totally indigenous.
"In such a scenario, foreigners will be hesitant to come to India to set up shop here. The trend throughout Asia is to reduce custom tariffs. We were hoping for the same here too. The sudden increase in customs duty would only mean a discontinuity in the country's policy. People would be wary of investing in India," asserts Bhargava.
However, there is another side to the argument, which is that foreign investors gain from the falling rupee.
"In dollar terms, FDI should not be affected by the hike
in import duty because when converted into rupee terms, the difference
caused by the import hike is nothing much. This level-playing field was needed because the foreign investor can avail of credit at much lower interest rates abroad, compared to the domestic interest rates," Dr S P Gupta, chairman, Society for Economic and Social Transition, told Rediff On The NeT.
Moreover, foreign direct investors do not make short term investments like those made by foreign institutional investors in the capital market. These long-term FDIs are not susceptible to market sentiment as are the FIIs. The constant flow of FDI need not be hampered by the import duty hike which could be reversed in the next Budget or even earlier.
Ironically, domestic industry, which was supposed to hail the measure, is not too happy with it.
"The Federation of Indian Chambers of Commerce and Industry did not formulate an opinion on the import levy is because domestic industry is divided on the matter," a FICCI official told Rediff On The NeT. "The user industry -- those who need imports as raw materials and other intermediaries -- will feel the pinch. But those who produce them would obviously welcome the measure. So the impact of the import levy varies from sector to sector and would depend on how import intensive a particular industry is."
Curiously, one sector that will be hurt is the one that the government badly wants to protect -- the small-scale industry.
According to the Federation of Indian Micro, Small and Medium Enterprises, hundreds of products ranging from electrical and electronic goods to personal computers, toys, chemicals and automobile components are affected.
With import duty adversely affecting even the domestic sector, all those who depend on imports for their industry's survival hope that the government would consider rolling back the massive levy of eight per cent.
Budget '98
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