Manufacturing Growth : Impact of Inverted Duty Structure

What is Inverted Duty Structure?
An IDS means higher duty on intermediate goods as opposed to final/finished goods, that enjoys concessional custom duty under certain schemes.
What was impact of IDS?
  • Chinese/other imports have swamped India’s small- and medium-sized enterprises and large manufacturing companies, raising the import-intensity of manufacturing as well as dampening job growth by raising capital intensity.
  • So the share of manufacturing in GDP and employment has not risen since 1991.
What has changed now?
  • The Union Budget has hardened the correction of the inverted duty structure (IDS), which has adversely impacted manufacturing for decades.
  • The Budget has raised customs duties significantly;
  • ‘Make in India’ dream is to realize that India becomes ‘factory of Asia and the world’.
  • The goods and services tax (GST), especially the IGST or Integrated GST component, has begun to erode the advantage that the IDS was giving to foreign exporters in Indian markets.
  • Customs duties have been raised on capital goods and electronics, and silica for use in manufacture of telecom grade optical fibre especially among the sectors adversely impacted by the IDS in the past decade.
Reasons that gave an edge to Chinese industrial success in comparison to India
  • India’s policy structure failed to utilise its labour advantage to grow labour intensive manufacturing exports.
  • While China reduced the absolute numbers and percentage of the poor in the population by absorbing surplus labour in manufacturing,
  • India’s poverty reduction was much slower.
  • While China’s agricultural and rural income growth was much higher as it sustained consumer demand, it also generated industrial jobs much faster.
  • Between 2011-12 and 2015-16, the growth of manufacturing jobs not only first slowed after 2011-12 but also became negative.
Chasing jobs
  • Labour force grew sharply to 12 million per annum till 2004-05; as a result of domestic manufacturing employment growth was slow, they could only be absorbed in agriculture or traditional services; and informal employment grew even more than ever before.
  • However, these entrants, much better educated than the earlier cohort, are now entering the labour force.
  • They want either white-collar jobs in the private or preferably public sector, or in industry or in modern services.
  • The youthful labour force, between 15 and 29 years, saw a very sharp increase of 40 million, from 147 million to 187 million between 2011-12 and 2015-16.
Looking ahead
  • The GST, has resulted in a neutralisation of the IDS.
  • This has also led to a formalisation of some informal firms, and hence workers (by registration in the Employees’ Provident Fund Organisation).
  • The resolution of the twin balance sheet problems (of companies being over-leveraged and banks unable to lend due to mounting non-performing assets), together with the Insolvency and Bankruptcy Code, should now open the floodgates for new manufacturing investment.
  • Finally, policy must attempt to close the loop between rising demand and supply through consumer demand, which the Budget attempts through its agriculture and rural infrastructure focus. 

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