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WORKING PAPERS
CountryOperations
CountryDepartment
The WorldBank
October 1992
WPS990
Protectionand Industrial
Structurein India
M. AtamanAksoy
and
Francois M. Ettori
MakingIndia's industrialincentiveschemetransparentrequires
making tariffs unifonmlylow and eliminatingall quantitative
restrictions on imports. Tariffs must be used only to provide
protectionand incentivesignals,not to raise revenues.
PolicyRschWod&ngPapersdissminatoicrmdingsofwokin p.ogms and encogctheexchangeofideasnamngBankstaff and
allothersin
dIvdopmentissues.Thesepape,
i
tributedbytheResarchAdvisoryStaff,cMethenmesotheauthors,reflat
onlydhirviews,andshouldbousedandcitedaccordingly.Thefindings.
intpretaions. andceonclusionsaretheauithoreown.Theyshould
not be attibuted to theWodd Bank.its Boardof Directors,its managenent,or anyof its menbr countries.
Policyllesearch
CounlryOperations
WPS 990
This paper-ajoint productof theSouthemAfricaDepartmentand of theIndustryandEnergyOperations
Division,MiddleEastand NorthAfricaCountryDepartmentI - is part of a larger studyof India's trade
regimeundertakenby the SouthAsiaCountryDepartmentIII. Copiesof the paperare availablefreefrom
theWorldBank, 1818H StreetNW,Washington,DC20433. PleasecontactRoseMatenda,roomJ 11-217,
extension35055(October1992,51 pages).
Effectiveprotectionrates in India are so high and
vary so greatlythat anythingshortof low
uniformtariffs and the completeeliminationof
quantitativerestrictionswouldnot make the
industrialincentiveschemetransparent,as it
needs to be.
Aksoyand Ettori produceevidenceto show
that there is ample scope for reducingtariffsand
quantitativerestrictionsand that most industries
could coexistwith much less protectionthan
theynow have.
By eliminatingall surchargeson inputs
(tariffson importedinputs,price differentialson
local inputs, nondeductibleexcise taxes)- even
withoutcorrectingfor the effectsof high investment costs- most projects(includingimportsubstitutionprojects)wouldearn from current
intemationalprices a positiveprofitmarginon
theirmarginal as well as full productioncosts.
T'hePolicyResearchWorking
Policy
Produced
Researchby
athe
The proportionof projectswith a positiveprofit
margin wouldtriple, from 20 percentto 63
percent.
Amongimport-substitutingprojectsthat are
not candidatesfor exportunder the presenttrade
regime,under the proposednew regimehalf
wouldbe candidatesfor exportif they would
procuretheir inputs at intemationalprices.
Lower tariffswouldfulfill their primary
purposemoreeffectively:providingprotection
and incentivesignals.The functionof generating
public revenues,anothercritical issue in India,
shouldbe fulfillednot throughtariffsbut through
moreefficientand protection-neutralinstruments
- in particular,directtaxation(incometax) and
nontariffindirecttaxation(neutralexcise taxes,
MODVAT,and preferablythe value-addedtax
on consumption).
disof workder way in ienBaneAnrobjectiveoftheseies
is to get thtese findings out quickly, even if presentaions are less than fully polished. The fmdings, interpretations, and
conclusions in these papers do not necessarily represent official Bank policy.
Produced by the Policy Research DissenmmationCenter
PROTECTION
MD INDUSTRIAL
STRUCTURE
IN INDIA
BY
M. ATAKAN
AKSOY
ANDFRANCOIS
N. ETTORI*
*
Principal Economist, Southern Africa Department, Africa Region, and Division
Chief, Industry and Energy Operations Division, Country DepartmentI, Niddle East
and North Africa Region, World Bank. This Paper is based on a larger study of
rndia's trade regime undertaken by the India Department. This study does not
reflect the major changesthat have taken place in Indian Trade Regimeafter July
1991. We wouldliketo thankMichael
Gould,WoldalFutur,Pradeep
Nitraand
DelfinGo for their coments.
Table of Contents
Incentivesand Protectionin Indian Industry
1
A.
Nominal and Effective Protection in Manufacturing
2
B.
SimulatingFree Trade
9
C.
Developmentsin Selected Subsectors
14
a) Iron, Steel, and Ferro-Alloys
b) Petrochemical Industry
c) Capital Goods Industries
18
23
31
Conclusions
48
D.
References
51
INCENTIVES
ANDPROTECTION
IN INDIANINDUSTRY
1.
India'sindustrial
policyenvironment
has gonethrough
majorcyclesof
tightening
and relaxation
overthe lastfew decades.Thesepolicyshiftshave
beencausedprimarily
by balance
of payments
crises.The adjustments
to the
BOPcrises have to a large extent been made(a) on the import side by increasing tariffs and restricting imports via various QRsand (b) by increasing
regulations on industrial investment, output adjustment and placing other
restrictions
on the ability
of firmsto adjustto changing
economic
conditions. The policyapparatus
thathasbeencreated
as a resultof thesecrises
havenot beendismantled
whenthe policyregimes
havebeenrelaxed.Instead,
ad hoc adjustments
and exemptions
havebeenintroduced
as specialschemes
to
easethe restrictions
and resulting
bottlenecks.
As a result,
a verycomplicatedpolicyenvironment
hasbeencreated
withoverlapping
layersof control,
riddled
withspecial
exemptions
and schemes.In the 1980ssignificant
reforms
wereimplemented
in areasof industrial
regulation
and exportpolicies
that
easedthe magnitude
of bottlenecks
thatfirmsand exporters
face. However,
the reformsin the importregimehavebeenmoremodestand the complexand
restrictive
structure
of the regimehas continued
to date.
2.
Net effectof the importregimehas beena gradualshrinkage
of international
tradeas a proportion
of domestic
output(Aksoy
and Tang,1991).
Highprotection
givenby QRs and increasing
tariffs
haveledto indiscriminate
importsubstitution
and veryhighproduct
pricesin Indiacompared
to
international prices. On the otherhand,specific
exemptions,
administered
pricing
of key inputsand unevendomestic
competition
haveled to certain
product groups enjoying very high effective protection while other product
groups having low or negative effective protection. Furthermore, very high
tariffs and taxes levied on investment goods to protect the domestic producers
haveerodedthe competitiveness
of evenotherwise
efficient
industries
and
require modifications in the interpretation of effective rates of protection.
3.
Thispapertriesto estimate
the structure
of incentives
and effective
protection
and its implication
for Indianindustry.First,the ratesof
nominal
and effective
protection
collected
fromvariousstudies
are analyzed.
Theseinclude
effective
protection
estimates
madeby Pursell(1988),
various
-2BICP reports
and otherfirmlevelinformation
collected
by the WorldBankfor
its subsector
studiesand projects.Second,the effectof movingto a freetradeenvironment
on different
subsectors
is analyzed
withthe use of a multisectorcomputable
generalequilibrium
model. The firmleveleffective
protection
estimates
are compared
withthe simulations
obtainedfromthe CGE
model. The CGE showsthatthe highereffective
protection
a subsector
enjoys,
the morenegatively
thissubsector
is effected
by movingto freetrade. In
the thirdsection
of the study,a detailed
analysis
of the protected
subsectors
are undertaken
to highlight
moreprecisely
the sources
and
structure
of theseinefficiencies.
A. NOMINAL
AND EFFECTIVE
PROTECTION
IN MANUFACTURING
4.
Thereare serious
problems
in estimating
effective
protection
ratesin
India.Many industries
are effectively
autarkic
where,depending
on the
degreeof domestic
competition,
domestic
pricesmightbe belowor abovelanded
pricesof imports(inclusive
of tariffs).In thiscontext,
deregulation
has a
veryimportant
effecton domestic
prices.Easingof entrybarriers
in many
subsectors
leadto a rushof investments
and eventually
to the creation
of
excesssupplies.Theseexcesssupplies
leadto lowerpricesthanthe tariff
inclusive
pricesof imports.Thusformanyproductgroups,
domestic
prices
are muchlowerthanlanded(inclusive
of tariffs)
importprices.
5. Anotherreasonfor non-equalization
of domestic
and importpricesis the
implicit
or explicit
pricecontrols
and canalization.
Publicsectorsupplies
a largeportionof intermediate
goods(especially
in metalsand chemicals)
and
thuseitherdirectly
controls
theirprices,
or controls
the pricesof imports
through
publicsectorcanalizing
agencies.Supplies
of manyof these
commodities
are alsorationed
to actualusers. Thus,firmsneeding
more
inputs(bothimported
and domestic)
thansupplied
by the rationing
systemhave
to importthe difference
(either
directly
or through
REP licenses)
at a higher
landedprice. In otherproducts,
Government
agencies
importthe products
at
hightariffsand sellat a pricethatis lowerthanthe landedprice,thus
crosssubsidizing
the imports
through
charging
otherlevieson domestic
production
(Pursell,
1988;Aksoy,1991). Thisis prevalent
in many
petrochemical
products.
of the pricing
overtimebecause
6.
EPRsIn Indiachangedramatically
products.By the natureof
formajorintermediate
of the Government
policies
etc.)
chemicals,
(metals,
pricesof intermediates
international
worldmarkets,
the Government
cyclical.In the nameof pricestability,
a-e substantially
adjusts tariffs on these products such that the International price fluctuare
prices.SinceERP estimates
ations are not passedon to the domestic
basedon comparisonsof domestic and international prices, certain sectors
on whentheyare made.
depending
ERP estimates
would showwidely varying
Nominal Protection. The overall effects of trade, protection and
7.
in the comparative
regulatory policies for industry are ultimately reflected
to interpricesrelative
ex-factory
products(domestic
pricesof industrial
to the users,i.e.,realized
prices,beforetaxescharged
national
pricesand CIF
ex-factory
Some500 priceratiosbetweendomestic
protection).
NPC)covering the period 1987coefficients
protection
importprices,(nominal
Banksubsectoral
of sources(BICPreports,
froma multiplicity
1989, assembled
analyses, DFI-financed sub-projects) are presented in Table1. These price
of the levelof
picture
comprehensive
ratiosprovidea reasonably
in the late1980s.
of Indianindustry
competitiveness
- 4 TABLE1:I NOMINAL
PROTECTION
COEFFICIENS
IN MANUFACTURING
PMOdI.qE
Edible Oils
MiscellaneousFoodProducts
TotalFoodIndustries
Cotton
Textiles
Synthetic
Textiles
TotalTextiles
191§-19A1 I 9
1.57
2.32
1.10
2.53
98
---
2.09 1.73
Rubber
Products
Plastics
Products
Overall Landed
Ilport
Prices
/a
2.11
1.13
2.26
(1989)
1.82
1.10
2.16
1.77
1.80
1.57
HeavyChemicals
Petrochems
Intermediates
Synthetic
Fibers/Resins
OtherChemicals
TotalChemical
Industries
1.87
2.31
2.17
1.96 1.82
2.47 1.98
3.38 1.68
1.84
2.19
2.32
1.56
2.04
2.27
2.30
2.23
1.47
2.14
Iron/Steel
Products
Castings/Forgings
Non-Ferrous
Metals(Aluminum)
TotalBasicMetals
1.51
2.08 2.01
1.74
1.34
1.23/b
1.54
1.89 (87-88)
2.17 (87-88)
2.09 (1987)
2.08
Machine-Tools
Non-Electrical
Machinery
Electrical
Machinery
TotalMachinery
1.72
Electronics
andParts
1.58
1.19
MotorVehicles
andParts
1.39
0.84
La
Lb
1.97
1.37
(1988)
(1989)
1.57
1.80
1.35
1.67
1.49
1.63
(1988)
1.26
Coefficient
of Landed
(inclusive
of tariffs)
to CIFprices
forimported
goods.
Mostly
Aluminum
products.
Note1: Subsectoral
NPCsareunweighted
averages
Note2: Sevenothersubsectors
withlessthan6 observations
eacharenotincluded
in thetable.
8.
Someproducts groups have a sufficiently
.arge numberof price comparisonsto permitthe estimation
of annualaverages
for 1986-87,
1988and 1989
separately.
The trendssuggested
by the annualaverages
confirm
otherindicationsderivedfromspecific
subsector
knowledge:
- slightly
declining
relative
pricesfor synthetic
textiles,
synthetic
fibersand resins,and
petrochemical
intermediates
and stablerelative
pricesfor heavychemicals
and
machinery.The increasing
trendfor iron/steel
products
is due to the shift
in the sample's
product-mix
overthe period1987-1989
frommildsteelto
-5specialsteelsand alloyswhichhavemuchhighertariffs.Table1 alsoshows
clearly
the tremendous
variability
of relative
pricesin Indiacompared
to
international
prices. Despitesignificant
realdevaluation
since1986,Indian
ex-factory
pricesin key subsectors
suchas metals,
machinery,
chemicals
and
otherengineering
products,
are stillbetween50% to 100%aboveinternational
prices.Whilepartof thiscan be attributed
to highertaxesand tariffson
inputs,
it alsoprobably
reflects
the veryhighprotection
givento these
industries
through
tariffs
and/orQRs.
9.
Anothercharacteristic
of the traderegimeis thatthe tariffs
are set
to keepthe landedpriceof imports
abovethe domestic
prices. Comparison
of
landedimportprices(inclusive
of tariffs)
to domestic
ex-factory
prices
showsthatlandedimportpricesare between
20% to 50% higherthanthe domestic prices. This "waterin the tariff"allowsdomestic
producers
to sell
theirproductsfirst(imports
takeplaceonlyif the domestic
supplyis not
sufficient
to meetthedomestic
demand)l/
and alsopermitsthemto investin
importsubstitution
withoutany fearof importcompetition,
evenif their
investments
are inefficient.
However,
thesehightariffs
on many
intermediates
and capital
goodsincrease
the production
costsof user
industries
substantially.
10. Effective
Protection.
The combined
effectof realized
protection
on
inputsand outputs,
and the low valueaddedcontent
of Indianindustry
(averaging
about25% in domestic
prices)
havegenerated
effective
protection
rates(EPR)thatvarywidelybetween
and withinsubsectors
and are generally
high. The EPRsalsofluctuate
significantly
overtimedue to changesin
international
priceswhichare not fullyreflected
in domestic
prices. Given
the low valueaddedcontent
of Indianindustry,
smalldeviations
between
domestic
and international
pricesleadto largechangesin EPRs. For this
reason,
an attempt
has beenmadeto mentiontheyear in whicha particular
EPR
estimate
is made. Table2 presents
some210 effective
protection
rates(EPRs)
fromvarioussources
groupedinto16 productcategories.
1/
Thisalsomeansthatthe firmswhichare growingrapidly
and/orneed
moreinputsthanwhatis allocated
to themat lowerprices,
end up
payinghigherpricesfor theirinputs.
TABLE 2
EFmCTIVE PROTECTIONRATES (Z) IN MNUFJACTURING
Product
EdibleOils
CottonYarns
SyntheticTextiles
PlasticProducts
HeavyChemicals
SyntheticFibers/Resins
Iron/SteelProducts
Castings/Forgings
AluminumProducts
Hand Tools
Machine-Tools
Non-Electrical
Machinery
ElectricalMachinery
Electronics
and Parts
Motor Vehiclesand Parts
Bicycles
EPR La
85
52
100
37
68
162
72
72
-16
33
21
64
42
92
19
24
Learlb
1988
1986
1985/86
1986
1987
1987
1986/87
EPRs are unweightedaverages.
/a Subsectoral
jb Year to which pertainthe largemajorityof observations.
are spreadover
When no year is indicated,the observations
1986-1989.
are not
with lese than 6 obeervations
Note 1: 11 other subsectors
includedin the table.
11. The levelsof effective
protection
are generally
highand suggestthat
ampleroomfor profits
grantsIndianindustry
of protection
the structure
protechigheffective
receive
A numberof subsectors
and/orinefficiency.
castings/forging,
iron/steel
products,
tion: edibleoils,heavychemicals,
synthetic
and particularly
machinery,
electronics,
non-electrical
fibers/resins
and synthetic
textiles.Few othersubsectors
appearto have
hand-tools,
machine-tools,
protection:
effective
loweror insufficient
and
and parts,cottontextiles,
motorvehiclee
electrical
machinery,
products.
aluminum
particularly
12. The EPR estimates
are basedon the comparison
of valueaddedin domestic
assumethatcapitalcostsare the
prices,and effectively
and international
do not levyhightaxesor QRs on
samein all countries.Sincemostcountries
However,
due to
approximation.
is a reasonable
goods,thisassumption
capital
-7the highcapital
costsin India,the observed
effective
protection
ratesneed
to be interpreted
withcaution.Indiais almostuniquein levying
suchhigh
taxesand tariffs
on capital
goods. Mostothercountries
usuallyexempt
machinery
fromimportdutiesand domestic
taxes. For example,
in Brazilwhich
has had veryhighprotection
for the domestic
capital
goodsIndustry,
the
tariffcollection
ratein 1984was 17% in non-electrical
and 11% in electrical
machinery.In Korea,the tariffcollection
rateson machinery
for domestic
use was about9% duringthe late1970sand early1980s. Tariffcollection
rateson machinery
for exportuse was negligible.
Evenin Pakistan
(whichhas
the secondhighest
overall
tariffcollection
rateafterIndia),
the tariff
collection
rateon machinery
was 15% in 1987/88.In comparison,
the average
tariffcollection
rateson machinery
in Indiawereabout75% in 1983/84
and
67% in 1987/88.Higherpricesfor capital
goods(domestic
or imported)
paid
by Indianfirmsimplythattheirvalueaddedshouldinclude
a largerreturnto
capital(interest,
depreciation
and returnon equity).Thiscontributes,
ceterisparibus,
to domestic
valueaddedexceeding
the valueaddedin
international
prices,
and to positive
EPRs. Thatis, the firmsin Indiawhich
may be as efficient
as the foreign
firms,willnevertheless,
showhigher
pricesand EPRs. Thus,to makeEPRestimates
in Indiacomparable
to other
countries,
the effects
of highercapital
costshaveto be takenintoaccount.
13. Ettori(1990),
has collected
dataon 60 appraisal
reports
for new
investments
prepared
by ICICI and IDBIduring1988and 1989. The dataon
theseprojectappraisals
havebeenreestimated
to separate
the effectof
capitalcostson EPRs. Thisdatashouldbe interpreted
withcaution
for the
following
reasons.First,the parameters
and datausedin projectappraisal
reportstendto be favorable
to comparative
prices(domestic
versusCIF)for
the projects'
outputs.Second,the projections
implicitly
assumethatthe
projects
willbe operated
efficiently
to minimize
production
costs(inputs,
labor,capacity
operating
ratio,... ). In practice,
actualproduction
costs
are oftenhigherthanprojected
during-ppraisal,
and domestic
ex-factory
pricesare thenincreased
as muchas permitted
by domestic
competition
and the
degreeof protection
provided
by theQRs and tariffs.Third,in manycases
excise(orCVD)taxeson inputsthatare reimbursed
underMODVAT,couldnot be
separated
frominputprices.So the inputpricesare overestimated.
For
thesereasons,
actualeffective
protection
ratesare underestimated
(see
Ettori,1990for the details
of estimation).
- 8-
14. The levelof EPRjustsufficient
to compensate
the firmsfor higher
capitalcosts(sufficient
to earna returnon investment
equalto thatunder
freetrade)is termedcompensatory
effective
protection
rate(CEPR).It
shouldbe mentioned
thatCEPRis not affected
by the dataproblems
mentioned
above. Table3 presents
the EPRSand CEPRsfor different
subsectors.
The
difference
betweenthe actualEPRand the compensatory
EPR is termedNet EPR
and measures
the protection
givento firmsabovethe levelnecessary
to
compensate
for highercapitalcosts.
TABLE St COMPENSATORY
ANDACTUAL EFFECTIVE PROTECTIONBY SUBSECTOR la
Subsector
Heavy Chemicals
Light Chemicals
Synthetic Yarns
Basic Steel Products
Electronics
Food Products
Other Engineering
Miscellaneous (Tires, Paper)
Total
No. of
Firms
9
3
3
7
8
4
14
5
53
CEPR (X)
41
49
60
46
24
41
49
37
42
Actual
EPR
69
-6
77
72
95
52
-11
61
46
Net
EPR
28
-55
17
26
71
11
-60
24
4
/a The averages are unweighted averages.
Sourcet Ettori, 1990.
15. Table3 showsthata largeportion
of the highobserved
EPRsare
actually
a compensaltion
for the highinvestment
costsin India. Between
2060 percentage
pointsof observed
EPRsare justa compensation
for highcapita'
costs. Sincethe estimates
of EPRsfor the overall
manufacturing
sectorare
around40X,mostof thatprotection
is justa compensation
for highcapital
costs(WorldBank,1989). The protective
systemon average
doesnot give
highnet protection
to the industrial
sector. However,
the variability
of net
EPRsamongdifferent firms is so largethatabouthalfof the firmsreceive
excessive
protection,
whiletheotherhalfreceive
negative
net protection.
ex-factory
priceof outputin thissampleis
the average
In the process,
pricesby morethan40%.
higherthaninternational
have
basicintermediates
producing
16. Table3 alsoshowsthatsectors
basic
products.For example,
highernet EPRsthandownstream
generally
products
yarnsand miscellaneous
synthetic
chemicals,
basicsteelproducts,
(whichare alsobasicinputssuchas tires,paper,etc.)havehighand
machinetools,light
firmsin engineering,
positive
net EPRswhiledownstream
averages
net EPRs. Againthesesubsectoral
havelowor negative
chemice:s
industry
which
is the electronics
Theonlyexception
havelargevariations.
and is meetinga pent-up
demandfor its products.
was recently
deregulated
havestarted
comingdownas
Morerecently
the pricesand EPRsin electronics
thesedemandsare satisfied.
the multiplicity
of tariffand tax rates,special
17. In conclusion,
have
degrees
of domestic
competition
exemptions,
special
schemes
and varying
created
a structure
of effective
protection
whichhas largevariability
across
much
thatgives,on average,
it is a structure
However,
firmsand industries.
the average
increasing
to the firmswhilesubstantially
lowernet protection
costof production.
FREETRADE
B. SIMULATING
thatthe
indicate
sections
in theprevious
18. The EPRssunmnarized
moreinefficient
and tendto
production
of key intermediates
are relatively
is basedon a sampleof products
however,
havehigherEPRs. Thisconclusion,
if the wholeeconomyis takenintoaccount.To observe
andmay not generalize
input-output
tablesare usuallyused
effects
of protection,
the economy-wide
do
however,
rates. Thesestaticestimates,
effective
protection
to estimate
changesin
adaustments
thataccompany
not take intoaccountthemacroeconomic
(i.e.,elimMovingto a freetradeenvironment
the levelof protection.
subsectors
tariffs
and QRs)willeffectindividual
ination
of protective
through
two channels.Firstis the effectof changesin relative
prices
effectis causedby
The secotid
causedby the changesin protection.
adjustments
thatare required
to compensate
for the tariffand
macroeconomic
QR changesand maintaininternal
and external
balances.The IndianGovernment
-
10
-
receives
closeto one-third
of itsrevenues
fromimporttariffsand lowering
balancesrequiring
of tariffs and QRswould effect external and internal
rates. Ideally,
adjustments in public expenditures, other taxes and exchange
protection
shouldassumethatall tradetaxesare
the simulation
of reduced
taxes.
aremadethroughlump-sum
removed
and compensating
fiscaladjustments
lesscorrect
theoretically
and therefore
In thisstudy,a morerealistic
adjustment
is assumed.First,the protective
tariffs
are assumedto be
for a
to a uniform20% ratherthanto zero. Thisis because,
lowered
in
considerable
amountof time,the revenuefromtariffs
willbe required
25% and all QRs are
to be a uniform
India.Second,the QR premiumis assumed
assumedto be eliminated.
Third,MODVATis extended
to allowthosesectors
registered
underMODVATto claimfullcreditfor exciseand CVD paidon
capital
goodsagainsttheiroutputtax liability.
19. Thissimulation
is madeusinga 72-subsector
generalequilibrium
model
developed
by Mitraand Go (1991) usingthedatabase
for 1987/88.The model
and attains
has an integrated
macro-fiscal
and micro-sectoral
perspective
the
It is capable
of tracing
simultaneously.
microand macroequilibrium
and deriving
aggregates
on the majormacroeconomic
effectsof policychanges
the impactof tax,tariffand expenditure
changes
on output,valueadded,
pricesand realratesof returnon the disaggregated
sectors
of the economy.
(SeeMitraand Go, 1991 fordetails
of themodel.)
of payments
to achievebalance
are simulated
20. Theseadjustments
neutrality,
i.e.,maintaining
the existing
currentaccount
deficit.Foreign
savingsis therefore
givenand domestic
savings
mustadjustto ensureequality
savings
may be raisedeither
Domestic
betweentotalsavingsand investment.
by cuttingpublicexpenditure
or by increasing
tax revenue
withfixedpublic
deficit
withtariffcuts
the current
account
expenditure.
Maintaining
of domestic
demand. Whilethiscan in
requires
a tightening
in themanagement
practice
be broughtaboutthrougha rangeof instruments
including
monetary
prices,the focushereis on fiscaladjustment.The
policyand administered
whilekeeping
government
is to raiseexcisetaxes-cum-CVD
firstalternative
the government
expenditure
constant
in realterms. In the secondalternative,
-
11-
reduces
domestic
demandby cutting
its own expenditures,
bothcurrent
consumption
and publicsectorinvestment.2/
21. Table4 summarizes
the industry
specific
effects
of movingto lowerand
uniform
tariffsand eliminating
QRs. The magnitude
of the outputchanges
summarized
belowshouldbe treated
withcautionsincethemodeldoesnot
incorporate
the effects
of endogenous
technological
improvements
thatwouldbe
induced
by greateropenness
to theworldeconomy.Changesin output,
therefore,
shouldbe treated
as illustrative,
indicating
the direction
of
changeand highlighting
the sub-sectors
thatwillbe affected.
2/
Bothalternatives
are potentially
contractionary.
The pricedeflation
causedby fiscalcontraction
mustbe accompanied
by a reduction
of
nominalwagesin orderto keeprealwagesfromrisingto values
incompatible
withthemaintenance
of baseyearlevelsof employment.
Sincenominal
wagesof manyworkers
are,however,
stickydownwards,
an
exchange
ratedevaluation
is required
to raisepricesand henceprevent
an increase
in realwagesinconsistent
withequilibrium
In the labor
market. The latterequilibrium
wouldhavebeenbroughtaboutwithout
policyintervention
if wageswereflexible
downwards.
- 12 -
TABLE4:
SUBSECTORAL
EFFECTSOF FREER TRADE
(1 Change)
Expenditure
Gross
Output
Adjustment
Rate of
Return
La
Tax Adiustment
Gross
Rate of
Output
Return
la
AGRICULTURE
0.8
0.8
0.0
0.0
ENERGY
0.7
0.7
-2.8
-2.8
-2.6
-1.9
-4.8
-4.1
-0.8
7.1
1.6
-6.7
6.9
-15.3
0.3
-16.6
-4.4
0.0
7.1
0.8
-5.0
6.9
-13.9
0.4
-14.9
-4.5
-2.6
2.1
-0.4
-8.9
6.6
-15.7
-1.3
-16.4
-7.4
-1.8
2.2
-1.6
-7.2
6.7
-14.2
-1.2
-14.5
-7.5
-1.8
-5.4
-1.0
-3.8
-2.9
-6.5
-2.2
-4.9
-1.1
-1.1
0.9
0.9
2.0
1.7
0.7
0.4
-1.0
0.0
-2.2
-1.3
MANUFACTURING
Food, Beverages and Tobacco
Leather and Textiles
Petroleum and Coal Products
Chemicals
Non-MetallicMineral Products
Metals
Metal Products
Machinery
Electrical Appliances
and Electronics
Transport Equipment
Other Manufacturing
CONSTRUCTION
SERVICES
TOTAL
Source: Mitra and GO (1991).
/a
Gross profit margin on output.
22. The resultssuggest
thatthe manufacturing
sectoras a wholecontracts.
Partof thiscontraction
is due to the factthatthe manufacturing
sectoris
highlyprotected
and thisprotection
is removed.An equallyimportant
partis
thatmostof the indirect
taxesare leviedon the manufacturing
sector. In
agriculture,
for example,
lowerprotection
is coupled
by highsubsidies
that
are not eliminated
in thesesimulations.3/
Despitethe limitations
of the
simulations,
the results
presented
in Table4 on manufacturing
subsectors
are
quiteconsistent
withthe conclusions
of the firm-level
EPRs. The three
3/
In India,the manufacturing
sectoris bothprotected
and taxed,while
agriculture
is disprotected
and subsidized.
In thisexperiment,
protection
is removed
but taxesand subsidies
are leftintact.
- 13 hardesthit sectorsare machinery,metals,and chemicals,indicatingthat
and are highlyprotectedby
thesesubsectorshave the greatestinefficiencies
the existingtrade regime. Exportorientedindustriessuch as textilesand
mineralproducts(gems)expandas a resultof changes
leatherand non-metallic
in relativeprices.
fiscaladjustment(tax
23. Table4 also showsthat the type of compensatory
differenceon what happens
cuts)make a significant
increasesor expenditure
cuts primarilyfall on
to differentindustries.Publicexpenditure
construction.The excisetax increases,on the otherhand, fall primarilyon
are
sector. This is becausegovernmentexpenditures
the manufacturing
while centralexcisetaxesare
on servicesand construction
concentrated
goods. Therefore,the reducedprotectionand
mainlyleviedon manufactured
sectorin
fiscaladjustmentthroughtax increasespenalizethe manufacturing
and capitalgoodsare affectedthroughlowered
two ways. Intermediates
protectionwhileconsumergoodsare penalizedby higherexcisetax rates.
sectordeclines
of the manufacturing
This is the reasonoverallprofitability
cuts.
by 4.1% undertax increasesbut declinesonly 1.9% underexpenditure
supplyadditionalevidence
despitetheir limitations,
24. These simulations,
productsand capitalgoods.
that the traderegimeprotectsbasic intermediate
The consumergoods,whichare also highlyprotectedboth by tariffsand import
impactof reducing
bans seem to have lowerprotection.The unevensubsectoral
protectioncan be tracedboth to the structureof externalprotectionand to
in the domesticindustry. In many
the unevenimpactof deregulation
and
greaterdomesticcompetition
instances,despitehigh externalprotection,
abilityto modernizeproductionfacilitieshave allowedfirmsto be more
and not utilizethe full protectionaffordedby the tariffsand
competitive
(1991) showsthat the total factorproductivity(TFP)growth
QRs. Ah'luwalia
in the 1980shas been highlyuneven. WhileTFP has grown at 6.0% p.a. for
consumergoods, it has grown 3.4% p.a. for capitalgoods and only 1.4% p.a.
goods. Thesenumbersare againconsistentwith higherEPRs
for intermediate
goods producingsectors.
observedon basic intermediate
- 14 -
D. DEVELOPMENTS
IN SELECTED
SUBSECTORS
25.
Industrial regulatory reforms during the 1980s have introduced more
competition
between
domestic
firmsby relaxing
regulations
on capacity
licensing,
production
levels,
and prices. Thesereformshavehad important
effectsin a numberof subsectors
whererealized
protection
has beenlower
thanthatafforded
by the traderegime.At the sametime,boththe firmlevel
EPRsand modelsimulations
outlined
in the previous
sections
indicate
thatthe
coreinputsupplying
sectors
of the economy
are highlyprotected
and
relatively
inefficient.
Thissection
firstpresentr few examples
where
liberalization
of the regulatory
environment
has ledto increasing
efficiency.
In the secondpart,a moredetailed
analysis
of the coresectors,
i.e.,steel,
petrochemicals
and capital
goodsis undertaken
to identify
moreprecisely
the
sources
of inefficiency
in thesesubsectors.
It shouldbe pointed
out that
the information
for thesesubsectors
is highlyunevenacrossdifferent
product
groups. Therefore,
the analyses
are partialand focuson productgroupswhere
the information
is available.
"
26. One successful
example
of liberalization
has beenthe cementsubsector.
Priorto 1982,thissubsector
was highlyregulated,
ex-factory
priceswere
controlled,
and plantswereobligedto sella partof theirproduction
to the
publicsectorat a below-market
"levy"prices. As levypricesfailedto keep
pacewithrisinginputcosts(e.g.,energy),
the pricecontrols
had an adverse
impacton the subsector's
profitability.
Moreover,
investments
in cementwere
constrained
by restrictive
capacity
licensing
policies,
particularly
towards
MRTPcompanies,
and by the levysaleexemptions
grantedto minicementplants.
In addition
the freight
equalization
scheme,
introduced
in 1956to permit
uniformcementpricesthroughout
the country,
distorted
decisions
regarding
plantlocation.
27. The reformsadoptedin 1982included
gradualreduction
and elimination
of the levycementobligation,
a concomitant
complete
decontrol
of prices,
elimination
of the freight
equalization
scheme,significant
relaxation
of
Investment
licensing
and entryof MRTPfirms,and easingin foreign
technology
transfers
and collaborations.
The response
of the cementsubsector
to liberalization
was impressive.
Investment
and production
accelerated,
price
increases
in deficitregions
broughtfurther
investments
in theseregions,
and
- 15 the domesticmarketbecomevery competitive.In responseto thesereforms,
the relativepriceof cementincreasedmarkedlybetween1982and 1985to first
declinedby
and then continuously
profitability,
the industry's
reestablish
about 18% relativeto the wholesaleprice index. Althoughimportsof cement
are restrictedand no importshave takenplacesince1986,the price of cement
with world prices,and some exportsare
in Indiais presentlycompetitive
takingplace.4/
also took place in a numberof subsectorsproducing
28. Liberalization
2-Wheelers).
and MotorVehicles(including
finishedgoods,such as Electronics
were largelydelicensedincluding'broadIn these two subsectorsinvestments
and foreigntechnologytransfersand collabbanding"of the product-mix,
betweennumerousdomestic
orationswere made easierafter 1984. Competition
amountsof resourceswere attractedin these subfirmsgrew, substantial
with
in conjunction
and productiongrowthaccelerated
sectorsfor investment,
more liberalpoliciesfor importsof components.Tariffswere rationalized
and reducedfor electronicindustries(30%on raw materialsand 45% on components,both on OGL, and 75% on finishedproducts,mostlyrestricted).The
had a beneficialimpacton pricesin
and enhancedcompetition
liberalization
where pricesdeclinednot only relativeto overallmanuthesetwo subsectors,
facturepricesbut also in absolutetermsduringa coupleof years in 1984 and
of domesticproductionand importswas
1985. The impactof liberalization
visiblein the electronicindustries.Table5 summarizesa few
particularly
subsector.
key indicatorsin the electronics
4/
of this subsector was
It shouldbe noted,though,that liberalization
by the smallamountof importsand the naturalprotection
facilitated
costs.
enjoyedby cementdue to transportation
-
16 -
IN ELECTRONIC
INDUSTRIEI
TABLE
5: TRENDS
M8
Am
nu
1981
179
467
590
Computers
90
43
52
Black 6 White Televisions
32
29
41
Printed Circuit Boards
83
S0
54
- Value AddedIndex (1980/81prices)
100
143
393
- Shareof Public Sector (%)
43
n.a.
- Number
of Firms
-
4-Firm
Concentration
Ratio(%):
-
32
n.a.
36.7
50.8
45.8
100
102.5
95.7
82.6
ConsumerProducts
100
85.0
76.5
80.0
Personal
Computers
n.a.L/
41.7
16.7
Components
100
106.5
97.5
Importsas percentageof Output
- PriceIndex:Overall
100 La
97.5
a PCsweremanufactured
in 1984forthefirsttime.
Source:Joseph(1989).
29.
As a result of the liberalization,output in this sector has grown more
than 25X p.a. in real terms in the 1980s. Relative prices have declined due
to domestic competition,and the share of imports,which first increaseddue
to import liberalization,has started to decline over the last few years.
Similarly, high rates of effective protection enjoyed by this sector in the
late 1980s started to decline recently.
30.
In the automotive subsector,too, competitionenhancement through deli-
censing
and the entry
enterprises
for
to improve their
market shares.
ucts (imports
of modern cars by Maruti
products,
enterprise)
with a focus on quality,
However, the absolute
are practically
(a public
protection
forced
and to fight
given to automotive prod-
banned) and the absence of minimum efficient
scale (MES) thresholdspermitted excessive entry of new firms and plants
with
inefficient sizes and investmentstoo small to ensure competitive productivity
and quality. Rationalizationof under-sized inefficientproducers, especially
-
17-
has emergedin recentwears.This
vehicles,
and lightcommercial
in 2-Wheelers
and its
industry
of the automotive
untilthe structure
to continue
is expected
by marketforces.
are rationalized
capacity
above,a numberof important
analyzed
withthe subsectors
31. By contrast
suchas iron
and intermediates,
raw materials
critical
providing
subsectors
liberaldid not receivesignificant
industries,
and steeland heavychemical
and machinheavychemicals
basicmetals,
groups,
ization.Threesubsectoral
by other
share(14%)of all inputsconsumed
a significant
ery, (a)provide
shareof fixedinvesta substantial
of the economy;(b)constitute
subsectors
ment (26%); and (c) absorb a large share of imports (39%). The share of these
three subsectors in inputs of somekey industries is given in Table 6.
TABLE 6:
3-SUBSECTORINPUT SHAU IN TOTALINPUTS
Output Subsector
Synthetic Textiles
Plastic Products
Pesticides
Paints
Drugs
Hardware
Metal Products
Electronics
Rail Equipment
Motor Vehicles
Bicycles
Other Transport Equipment
Miscellaneous
Input Coefficients (1 of output)
Machinery
Basic
Heavy
and Parts
Metals
Chemicals
17.4
31.7
20.5
33.5
18.5
0.4
0.8
1.7
0.4
0.5
1.5
1.2
1.8
0.2
1.0
1.5
1.5
1.4
36.4
42.5
3.4
26.2
25.4
21.9
24.3
18.2
1.5
0.4
0.8
1.2
1.2
1.4
0.4
20.9
3.9
3.0
1.6
1.5
1.7
3-Subsectors
as X of
Total Inputs
27.0
46.3
30.9
48.6
31.1
61.5
66.8
42.7
50.9
45.1
39.7
38.9
37.5
in totalinput
32. Table6 showsthatthe shareof thesethreesubsectors
to 45% in
textiles,
rangefrom27% in synthetic
sectors
use of someimportant
of thesekey
and pricing
and 67% in metalproducts.Efficiency
motorvehicles
of the
thecoststructure
determine
willessentially
sectors
inputsupplying
thesethree
it is exactly
sector.Unfortunately,
restof the manufacturing
prices,and
tariffrates,highestrelative
thathavethe highest
subsectors
it is these
Furthermore,
protection.
alsohaveveryhighratesof effective
fundsand
bulkof the publicinvestment
thathavereceived
threesubsectors
- 18 -
The issuesconfronting
theirshareof outputsubstantially.
haveincreased
below.
are discussed
thesesubsectors
(a) Iron.Steeland Ferro-Alloys
subsector,
manufacturing
mostimportant
33. Ironand steelis India's
outputand valueadded. It has two
for about10% of manufacturing
accounting
mainlyof
mildsteeland consists
produces
one segment
different
segments;
specialsteels
produces
integrated
steelplants(ISP), and the secondsegment
plants(MSP).The ISP segmentis dominated
by mini-steel
and alloysprimarily
of IndiaLimited(SAIL)and its
SteelAuthority
by publicenterprises
affiliates,
and the privateIronand SteelCompanyLimited(TISCO).The
through
the JointPlantCommittec.
are regulated
pricesof mildsteelproducts
Userpricesof domestic
mildsteelwhichwerecompetitive
in the early1980s
(byabout50-60%)aboveinternational
pricesduringthe
shotup substantially
currency,
declines
in
period1982-1987.Thiswas due to the appreciating
in publicsectorsteelplants
international
pricesof steel,inefficiencies
and varioustaxesand leviesplacedon steelproducts.Priceincreases
in
of majordownstream
steeljeopardized
the competitiveness
and exportpotential
industries,
in particular
engineering
and capital
goods. Recentfavorable
investments
and increased
efficiency
in public
developments;
modernization
ISPs, pricerestraint,
depreciation
of the exchange
rate,and increasing
international
pricesof steelas of 1988,reversed
the trendof comparative
some
prices,and domestic
pricesof mostmildsteelproductsregained
international
competitiveness
in 1988-1989.By contrast,
highprotective
tariffsfor special
steelsand alloys(110%to 345%nominaltariffsand 5060% tariffcollection
rates)andquantitative
restrictions
on imports
of such
steelshavepermitted
inefficient
MSPsto selltheirproducts
at pricesmore
than100%aboveinternational
pricesand stillsurvive
despitehighproduction
costsstemming
fromtheirsuboptimal
capacities.In viewof the negative
impactof suchpriceson downstream
industries
(automotives,
capital
goods),
theGovernment
has introduced
minimumefficient
scales(MES)of 50,000tons
p.a.for MSPs. Abouthalfof the 50 existing
specialsteelMSPshave
capacities
abovethisMES. Table7 showsthe structure
of production
in iron
and steelsubsectors.
-
19
TABLE 7t IRON AND STEEL
-
-
STRUCTURE OF PRODUCTION
Nild Steel
ProducNo.
Plants Capacity tion
Special Steels/Alloys
ProducNo.
Plants Capacity tion
(OOOT)-----
-----(OOOT)---------
IntegratedSteel Plants (ISPa)
SAIL (Public Sector) La
TISCO (Private)
6
1
8,600
2,000
6,800
2,170
2
1
130
75
120
80
Mini-Steel Plants (MSPs) 150
3.000
2,760
50
1,800
800
15,600
11,730
53
2,005
1,000
Total
157
/a Including IISCO's two plants, which are managed by SAIL.
Notes Capacity and Productionare expressed in terms of saleable steel.
34.
InternationalTrade in steel is now confined just to imports,which
totalled 1,660,000 tons in 1988/89 includingabout 100,000 tons of special
steels and ferro-alloys. Exports peaked in the late 1970s (up to 5% of
output) when India was a low cost producer of steel, and vanished after 1982
when domestic productioncosts became uncompetitive. The bulk of imports are
canalized through SAIL and other public bodies while a small share (about 10%)
is available under Limited Permissiblelicenses.
35.
Protective tariffs in this subsector range between 25% (metal scraps) to
110% for alloys and 345% for stainless steel, with a weighted average of 40%.
The actual collection rate for protectivetariffs and excise taxes were 34%,
and 2% respectively. These collections rates were respectively24% and 9% in
1973/74, illustratingthe trend of increasingtariffs and decreasing excise
taxes.5/
36.
Prices of mild (basic) steel have been regulated by the Joint Plant
Committee (JPC), which comprises the secretary of the Steel Department,
representativesof all steel producers,and a representativeof the Railways
Department. Since the early 1980s, when steel price regulationswere liberalized, the JPC has set the steel prices for ISP's major products without the
5/
The collection rates vary depending on the type of product. For metals
as a group, the protectiveand total tariff collection rates are 71% and
81% respectively. In ferrous metals, these rates are 66% and 73%
respectively.
- 20 -
Government'sformal approval. The JPC-set prices comprise a retention
(producer) price, and various taxes and levies (for the Steel Development
Fund,the Freight
Equalization
Fund,and the Engineering
GoodsExport
Assistance
Fund)whichincrease
userprices30-35%aboveproducer
prices. The
producer
pricesare determined
on a cost-plus
basisto allowfor a reasonable
returnon investment.
Suchadministered
priceshavenot givenadequate
incentives
for improved
performance
andmodernization,
and havedilutedthe
competition.
Despitepressures
frommajorsteelconsumers
likerailways,
steelpricesexperienced
a rapidincrease
over1975-1985
(11%p.a.)which
sloweddownslightly
in recentyears(8.5%p.a.over1986-1987).
37. Pricesof domestic
mildsteel,whichwerecompetitive
up to the early
1980s,increased
markedly
aboveinternational
pricesin the mid-1980s.Due to
increased
efficiency
and pricerestraint,
realdepreciation
of the exchange
rate,and increasing
international
pricesof steel,Indianpricesof mostmild
steelproducts
now appearto be closerto international
prices. The price
ratios(ex-factory
to FOBprices)are presented
in Table8.
TABLE6t NPC. FOR STEE PROUDCTS
MlId Steel
Sgecial St ll/Al loyv
Product
1980 1985
198S
1989
Product
Mid-1988
WireRods
0.7 1.88
1.06
0.91-1.00 CuttingSteel
2.6-2.7
Plates
0.64 1.50 1.04-1.110.92-1.18 Stainless
Steel
1.6-2.9
HR Coll*
0.88 1.69 1.05-1.101.09-1.14 SpringStool
2.64
CR Coils
0.98 1.72 1.02-1.160.94-0.95 Ball-BaringSteel 2.24
Galvanized
Plates 0.98 1.84 0.92
N.A.
AlloySteels
2.2-2.8
Sources: - Industrial
Costsand Prices,CEI Study(August1988).
- International
Competitiveness
of IndianSteelIndustry,
ArvindPande (1989).
- EconomicTime, August12, 1988.
38. On the other hand, prices of non-ISP producers, (in particular ministeelplants)and special
steels/alloys,
are unregulated
and determined
by the
conditions
of highlycompetitive
domestic
markets(except
for ferro-chrome);
takingintoaccountthe importrestrictions
(canalization)
and the high
protective
tariffsfor specialsteelsand alloys(110%to 345%nominal
tariffs,
and 50% to 160%tariffcollection
rates).Giventhe permanent
shortage
of special
steelson themarket,domestic
priceshavebeendrivenby
-
21 -
landedprices(afterduties)
of imports
and havegenerally
beenmorethan100%
aboveinternational
prices.One exception
is Ferro-Silicon,
wherethe recent
doubling
of inteinational
prices(fromUS$500to US$1,000
per ton)madeIndian
pricescompetitive.
39. As a result,
theprofitability
has beenhighformini-steel
plants,
particularly
forthosewithproduction
capacities
above50,000tonsp.a.
Financial
resultsfor a sampleof 9 MSPsindicate
net profitto net worth
ratesranging
between12% to 52% and dividend
ratesof 3 to 15%. On the other
hand,mostMSPswithsmallfurnaces
andobsolete
technologies
havemediocre
financial
results.
40. The analysis
of theproduction
coststructures
presented
in Table9
indicates
highefficiency
of raw materials
use and goodprofitsin TISCO(the
onlyprivateISP)as compared
to SAILand MSPs. Amongministeelplants,the
efficiency
and coststructures
varygreatlydepending
on the capacity
utilization
whichin turnis dictated
largely
on availability
of power,a
critical
inputfor MSPs.
TABLE 9: PRODUCTIONCOST STRUCTURES
SAIL
TISCO
(1987/88) (1988/89)
Raw Materials
Energy
Labor
Other Inputs
Interest/Depreciation
Total Costs
Gross Profit (1 Output)
43
9
14
23
11
100
-1.0
3
40
]
]
]
40
20
100
11.0
MSPs (1988/89)
Range (in t) Average (1)
25-62
15-46
3-12
9-28
5-19
100
6-11
46
18
9
20
7
100
9.5
- 22 EffectiveProtectionalso varieswidelybetweenthe typesof plants
and steelquality
(ISPs versusMSPs),products(flatversuslongprodiucts)
(mildversusspecialsteels/alloys).Table10 assemblesthe fragmentary,
and
largelyoutdated,availabledata on EPRs.
41.
TABLE 10: EFFECTIVE PROTECTIONRATES
Product
Year
NPC
Output
ISP: SAIL (public)
ISP: TISCO (private)
MSPs (Mild Steel)
CR Coils
CR Coils (MSP)
GalvanizedPlates/Sheets
1985
1985
1985
1985
1987
1988
1.30
1.31
1.43
1.61
1.70
1.68
EPR
a )
Input
0.89
1.11
1.35
0.89
1.52
1.66
74
51
32
112
174
93
Sources: Pursell (for 1985) - DFI subprojectappraisal reports.
The value addedcontentin ISPs is high,averagingabout50%. It shouldbe
noticedthat the EPR for SAIL is higherthan for TISCO,due to the former's
accessto inputs(coal,ironore) at preferential
prices. The value added
contentis quite low in MSPs. For example,the basicproductionparameters
and pricesfor an MSP projectto producecold rolled (CR)coils in the late
1980sare as follows:
Prices (Rupees Per ton)
CIF
NPC
Domestic
Output: CR Coils
14,750
8,950
1.65
Inputs: HR Coils (Local)
8,380
5,710
1.47
HR Coils (Imported)
10,700
5,710
1.87
Value added share in output at internationalprices: 16Z
42. It is quite likelythat effectiveprotectionhas decreasedin the mild
steel ISPs duringrecentyears with the increasedcompetitiveness
of steel
prices. Pricesfor the major inputs(ironore, coke)expressedin foreign
exchange(US$)have remainedlargelyconstant. On the other hand,pricesof
major mild steelproducts(rods/bars,
plates/sheets,
HR coils)expressedin
foreignexchangehave come down. Undersuch circumstances,
the EPR of SAIL
may presentlybe about30% and that of TISCOaround10%. In view of the high
protectionand pricesof theiroutput,effectiveprotectionin special
steel/alloy
producingMSPs most probablyremainshigh. However,the
23 information
base on specialsteelsand alloysis incompleteand does not allow
more preciseanalysis.
43. Conclusions.Theseresultsindicatethat in mild steelproducts,
protectivetariffscan be reducedto 20-30%rangewithoutsignificant
effects
on theviability
of mostof theexisting
enterprises.
Furthermore,
their
imports
canalsobe placed
underOGL.6/Theinformation
on special
steels
is
lessclear,
but,except
forveryinefficient
MSPs,abouthalfof thefirmscan
survive
withmuchlowertariffs.
Giventhesmallamount
of laborandcapital
ina special
steels
andtheirimportance
in engineering
andespecially
capital
goodsproduction,
exitof theveryinefficient
producers
canbe seriously
considered.
Furthermore,
special
rehabilitation
packages
canbe introduced
forthemoreefficient
firms.
44. In non-ferrous
metals,
thesituation
isalsomixedandtheinformation
isnotavailable
on a consistent
basis.Aluminum,
whichhasthebiggest
share,
is nowproduced
at veryclosetoworldprices.However,
in itemssuch
as copper,
domestic
prices
aresignificantly
higher
thantheinternational
prices.Inotherproducts,
Indiaisa netlargeimporter
andmostof the
tariffs
arepurely
forrevenue
purposes.
45. Casting,
forging
andfoundry
subsectors
havenotbeenanalyzed
in
detail.However,
theexisting
firmsin thesesubsectors
willprobably
have
moreserious
problems
thanthemildsteelproducers.
Theprotective
tariff
collection
ratioforthissubsector
isaround
80%,andmanyfirmsoperate
with
outdated
technologies.
(b) PetrochemicalIndustry
46. Thoughrelatively small within manufacturing(about 1.5 to 2%of
manufacturing
output
andvalueadded),
thiscomplex
subsector
is important
for
a number
of reasons.
First, it hasbeengrowing
veryfdstduring
thepast
decade
andis attracting
largeinvestments.
Second,
itsproducts
havea wide
6/
In 1989SAILproposed
to reduce
thetariffs
to 30 percent
andplaceall
mildsteelitemson OGL. Itwasrejected
by Department
of Steel.
- 24 varietyof applications
as intermediates
in many other industries.
Petrochemical
productscan be broadlycategorized
as follows:
(a)
primaryIntermediates/aromatics,
such as ethylene,propylene,
benzene,toluene,styrene,xylenes,monoethylene
glycol (MEG),
acrylonitrile
(ACN),PTA,DMT, caprolActam,
which in turn are used
to manufacture
secondaryproducts;
(b)
polyolefins("plastics")
comprisingprincipallylow densityand
high densitypolyethylenes
(LDPEand HDPE),polypropylene
(PP),
polystyrene(PS)and polyvinylchloride(PVC);
(c)
syntheticrubbers,such as styrenebutadienerubber (SBR)and
polybutadiene
rubber(PBR);and
(d)
syntheticfiberssuch as nylon,acrylicstaple (ASF)and polyester
staple(PSF).
47. Existingstructureof production,
and ownershipare presentedin
Table11:
TABLE 11: PETROCHEMICALINDUSTRY: STRUCTURE OF PRODUCTION
Product Group
Polyolefins
Aromatics/a
Resins/Rubbers
Fibers
Detergents
/a
Tb
Capacity
610
395
50
18O0b
195
Output
(OOOT)
270
295
35
150
n.a.
Imports
290
n.a.
25
5
n.a.
Ownership Pattern
Public Jt/Prvt
90?
12Z
60?
-152
10o
88Z
40?
100?
85Z
Including benzene/toluenecapacity and output of steel plants.
Includes only the major producers,which account for about 85? of
total capacity.
48. Governmentregulations
are pervasivein this subsector.Althoughthe
firsttwo Indianpetrochemical
plants (naphthacrackers)were set up by the
privatesectorin 1960s,the industry'sstrategicplantsprovidingthe
critical'buildingblocks" (intermediates
and aromaticproducts)is dominated
by the publicsector. Currently,largeprivateinvestments
are enteringthe
-
25
-
industry. The sectoris not deregulated
and licensesare neededfor new
investments.Moreover,the initialpolicyfor the subsector's
development
was
for import-substitution
aimedat servinga smalldomesticmarket. As a
result,most existingplantshave had capacitiesmarkedlybelowMESs and
consequently
uncompetitive
productioncosts.7/ In addition,the Government
has established
a complexand ad-hocsystemof tariffs,inputpricingand
regulations
governingmost intermediates
and semi-finished
products(e.g.,
benzene,styrene,xylenes,caprolactam,
DMT, PTA, PSF,...). Importsof many
productsaffectingthe sectorare subjectto QRs, especiallycanalization.
The canalization
agenciesadjustimportto the demandgaps unmetby domestic
productionand supplythe localdemandfor many productsat regulatedprices
(i.e.,weightedaveragesof importand cost-plusdomesticprices).These
regulatedpriceshave a looseand erraticrelationship
with CIF and landed
(includingtariffs)prices.
49. The situationis furthercomplicated
by Governmentcharginghigh prices
for the basic inputsof the industry(60-80%aboveinternational
pricesfor
naphtha). Existingpetrochemical
plantshave been based on naphthabut the
new ones are to be based on both naphthaand gas. Debatehas been goingon
for the last two yearson the priceof gas to be chargedfor petrochemical
plants. Recently,agreementshavebeen reachedto chargea price closeto
international
energyequivalentlevels.
50. Importsof petrochemical
productshavebeen determinedprimarilyby
shortfallin domesticproduction.Theseshortfallshave been substantial
for
thoseproductswheredomesticcapacityis still insufficient
to meet domestic
demand (e.g.,polyolefins),
and representnow about23% of domesticoutput
(51% in valueafterduties). Petrochemicals
are thus one of the few product
groupsfor which importsconstitutea substantial
shareof the Indianmarket.
Importregimesrangefrom OGL (e.g.,polyolefins,
syntheticrubbers,MEG) to
canalized(e.g.,naphtha,benzene,p-xylenes),
and restricted(e.g.,ACN, PA,
DMT). Importshavebeen effectively
bannedfor productswith sufficientor
7/
In order to avoid the recurrenceof past investment
patternsand
creationof sub-optimal
capacities,
the Governmentnow imposesminimum
efficientscalesfor new investment.Furthermore,
many of the
suboptimalplantshave been expandingtheircapacitiesto the specified
MESs.
-
26 -
excessivedomesticcapacity(e.g.,PSF, linearAlkylbenzene(LAB)as of
January1988). Substantial
progresshas, however,been made in rationalizing
the importregimefor polyolefins(commodity
plastics)which have been placed
on OGL and tariffsloweredand made more even.
51. Protectivetariffsas a rule are variableand high. Afterdecliningin
the 1970s,the tariffand excisecollectionrates increasedmarkedlyfrom 87%
and 15% in 1978/79to 117%and 24% in 1987/88respectively
and are now among
the highest. Petrochemical
productsare considered"luxury"productsand
taxed accordingto Government's
revenueneeds. Protectivetariffspresently
are about50% for plastics,65% for styrene,about85% for syntheticrubbers
and resinsand benzene,about90-100%for xylenesand caprolactam,
150% for
basicbuildingblocks (ethylene,
propyleneand butadiene)and MEG, and 195%
for PTA and DMT. Thereare numerousad-hocrates as well as exemptions.
Since international
pricesof petrochemicals
are highlyvolatile,Government
triesto adjustthe tariffsto maintaindomesticprice stabilityand the level
of protection.8/However,thereare usuallylags and delaysin these
adjustments.In any case,theseadjustments
usuallyaffecteithersome
segmentsof industryor downstreamusers.
52. Profitability
of petrochemical
companies,both in publicand private
segments,has tendedto vary with international
prices: profitability
was
relativelylow in the early 1980sbut has been relativelyhigh in the second
half of the decade. IPCL,the leadingpublicsectorfirm in petrochemicals
and the dominantone in the sector,has recordedhigh profitrates (11% of
sales and 16.5%of capitalemployedin 1987/88);significantly
abovethoseof
otherpublic sectorfirms. The same patternhas prevailedin the private
sector (Table12). Profitability
ratiosof privatepetrochemical
firms have
been significantly
above industryaverages.
8/
For example,p-xylenetariffswere loweredin 1988;plasticstariffs
were loweredin 1988 and 1989 and increasedagain in 1990.
-
TABLE 12s
27
-
PETROCHEMICALS: PRIVATE SECTOR PROFITABILITY
RATIOS
1982-83
1985-86
1987-88
Basic Petrochemicals:
Gross Profit to Sales(Z)
Return on Capital(Z)
6.7
8.8
14.7
21.7
13.0
20.1
Plastics:
Gross Profit to Sales(Z)
Return on Capital(Z)
11.0
13.9
12.9
20.3
13.3
22.7
All Industries:
Gross Profit to Sales(Z)
Return on Capital(Z)
10.5
16.7
10.5
16.0
9.6
13.3
Source:
Financial Performance of Private Companies, ICICI.
53. Othersourcesconfirmthe high profitability
of privatepetrochemical
firms. For a differentsampleof 9 largecompaniesin 1988/89,the gross
profitto salesand returnon capitalratioswere 18% and 22.3% respectively,
yieldinga net profitto net worth ratioof 27.3%.
54. EffectiveProtectiongrantedto the industryby the complexsystemof
importquotamanagementand priceadministration
has been high,rangingmostly
between60% and 177%. Table13 summarizesthe availableEPR estimatesfor
petrochemicals.EPRs relatingto IPCL are basedon actualpricedata of 1987
(Pursell,1988). The other EPRsare derivedfrom appraisalreportsof DFIs
for their 1988/89projects.
- 28 TABLE 13:
Product
Year
PETROCEEHICALS- EFFECTIVE PROTECTIONRATES
Nominal ProtectionRate
Output
Inputs
Effective
Protection
Rate(Z)
IPCL: PS
LDPE
PBR
LAB
DMT
Overall
1987
1987
1987
1987
1987
1987
144
102
66
67
227
110
217
116
135
50
113
41
64
90
17
177
428
225
EPDM Rubber
ABS
Nitrile Rubber
Alpha-Olefins
MA
PA
PO/PG/Polyols
1988
1989
1989
1989
1989
1989
1989
67
77
77
77
61
100
83
47
73
82
111
61
59
n.a.
121
86
68
25
61
101
135
Source: Pursel_ (1988), DFIs.
to separatethe effectof
55. Existingfirm leveldata has been reestimated
higherpricesof inputsand capital,and the requiredlevelof nominal
protectionto compensatefor these highprices is termed"compensatory
protection."Table14 comparesthe officialtariffswith the realizednominal
protection(ratioof domesticto international
prices)and the levelof
nominalprotectionrequiredto compensatethe firmsfor the high costs of
investmentand inputs (compensatory
protection)
in India.
- 29 TABLE14:
PETROCMDI[CALS- NOMIRALPROTECTIONRATES
Product
Protective
Tariff
Intermediates
p-xylene
MEG
PTA
DMT
ACN
Caprolactam
ABS/b
Alpha-OlefinsXb
MALb
PA/b
115
148
208
210
110
72
145
95
115
115
Polyolefins
LDPE/LLDPE
HDPE
PP
PS
PVC
57
65
50
50
40
SyntheticRubber
PBR
Buta Rubber /b
EPM Rubber /b
100
85
85
Synthetic Fibers
ASF
PSF
180
213
Import
Resime
Canalized
OGL
Restricted
Restricted
Restricted
Canalized
Canalized
OGL
OGL
Canalized
OGL
OGL
OGL
OGL
OGL
OGL
Canalized
Canalized
n.a.
Restricted
Realized
Protection
(NPR.Z)a
Compensatory
ProtectionCl)
110
64
75
75
70
68
77
77
81
110
42
36
31
24
28
16
55
82
47
32
14
10
20
28
11
43
48
32
31
15
66
77
67
19
68
44
137
192
24
32
La
These price ratios, valid for one point of time (generallyin 1988), are
only indicative, given the volatility of domestic and international
prices in recent years.
/b
Projected parameters for DFI subprojects.
56. The domestic
pricesgivenby realized
protection
are generally
lower
thanthe landedprices(CIFplusprotective
tariffs)
and in turnhigherthan
the protection
required
to compensate
for the extracostsof capitaland
inputs(compensatory
protection).
Tariffs
containsubstantial
amounts
of
Nwaterw
introduced
largely
for the purpose
of generating
publicrevenuefrom
- 30 -
the imports.Despite
this,domestic
prices,
resulting
fromthe regulatory
and
pricing
framework,
havepermitted
localfirmsto earnhighprofitmargins.
The costof highprotection
has beenpassedon to the downstream
industries,
especially
to the synthetic
textiles
industry.
57. Conclusions.
In 1988,BICP,at the request
of Government
prepared
a
reporton aromatics
subsector
givingits recow-mendatfons
on futuretariffand
importpolicy(BICP19__). The BICPrecommendations
on the basicbuilding
blocksof petrochemicals
are:
*
The existing
canalization
of naphthaand fueloil imports
should
continue
but thedomestic
priceshouldbe aligned
to CIF prices
plusa 25% importduty.
Depending
on the long-term
priceof naphtha,
tariffs
on benzene
and tolueneshouldbe changed
from0 and 85% respectively
to a
rangeof 40% to 55%. Thesecommodities
shouldbe movedfromthe
canalized
to OGL-stock
and salelist.
P-xylene
and o-xylene
tariffs
shouldbe reducedfrom120%and 125%
respectively
to a rangeof 55% to 70%. Theyshouldbe shifted
fromOGL-actual
userto OGL-stock
and salelist.
58. Theproposed
tariffrevisions
for thesebasicintermediates
shouldbe
partof a tariffand policyreformforthe downstream
products(e.g.,DMT/PTA,
caprolactam,
PSF,PFY,NFY,...)
to ensurethatthe resulting
reduction
in
pricesof aromatics
are reflected
in a corresponding
declinein the pricesof
thesedownstream
products.
59. According
to the estimates,
the existing
polyolefin
plantsare totally
naphtha
basedand theircapital
costsare almostfullydepreciated.
Thereis
a verylargeinvestment
program
beingundertaken
for the basicpetrochemical
industry
basedon naphtha
and natural
gas. Evenwithnaphthapricesat 6080% higherthanCIF prices,the bulkof the existing
industry
can coexist
with
averageprotective
tartffs
of about40%. Replacing
the highnaphthaprice
- 31 differential
by an equivalentexcisetax and includingit withinthe MODVAT
schemewould allowthe Governmentto reducethe protectivetariffseven
further. For new gas basedplants,if the naturalgas pricesare set at
international
energyequivalentlevels, even with high capitalcosts,the
amountof protectivetariffrequiredis about30%.9/ If capitalcosts are
also reduced,the protectivetariffscouldbe reducedeven further.
60. In other chemicalbased industries,
the situationis not so clear. In
inorganicchemicals,the existingaverageprotectivetariffcollectionrate is
quite low (about32%) and for many acids,thereare significant
natural
protectiondue to high transportation
costs. However,the low tariff
collectionrate in this subsectoris due to low tariffson phosphoricacid and
ammoniawhich are inputsinto fertilizer
production.The averageprotective
tariffcollectionrate for other inorganicchemicalsis about 100%. The
fertilizersubsectoroperateswith very low tariffsbut the retentionprice
systemfor each enterpriseand the canalization
systemeffectively
subsidize
the inefficient
producers.
(c)
Capital Goods Industries
61.
This cluster of subsectors producing machinery and equipment (both
electricaland non-electrical),
excludingconsumergoodsand durables(motor
vehicles,electricalappliances,
and electronicgoods),have traditionally
fulfilleda centralrole in India'sdevelopment
planningand policies. Indian
planners, who had initially
identified this set of subsectors to be strategic
in their quest for economic self-sufficiency,
have promoted their development,
notably through the creation of new public enterprises (PEs) and the takeover of failing private engineering firms.
16/
At this level, the firms (IPCL) still
the manufacturing sector average.
have a profit
rate 60% higher than
- 32 62. Capital
goodsindustries
are defined
hereinto comprise
the following
three groups of subsectors:
Non-Electrical Machinery
Electrical Machinery
- Agriculture
Machines
- Food/Textile
Machinery
- OtherIndustrial
Machinery
- Machine-Tools
- OtherNon-Electrical
Machinery
- Electrical
Industrial
Machinery
- Electrical
Cables/Wires
- TeleCommunications
Equipment
- OtherElectrical
Machinery
Transport Equipment
-
ShipBuilding
RailEquipment
Thesesubsectors,
representing
10%to 13%of manufacturing
outputand value
added,constitute
the largest
groupof industries
in India.
63. Structure.The production
structure
of the capital
goodsindustry
is
presented
in Table15:
TABLE 15s CAPITAL GOODS: STRUCTURE OF INDUSTRY
Structure (2)
1980181
1987188
Non-ElectricMachinery
ElectricalMachinery
Transport
Equipment
TOTAL
as 2 of Manufac-
Public
Growth (Z p.a.)
Sector
1981-1984
1985-1988 Share(X) /a
46
39
15
100
9
100
12.5
10.6
5.7
9.0
48
43
6.3
10.4
5.9
23.9
19
59
7.1
6.9
36
8.0
13.1
37
turing Sector
/a
In 1984/85.
Growthof the capital
goodsindustry
accelerated
in the late1980sfasterthan
thatof theoverallmanufacturing
due primarily
to rapidgrowthin the
electrical
machinery
sector,
especially
electronics
(computers,
telecommunications
equipment).
Growthdecelerated
in themoretraditional
sectorsof
non-electrical
machinery
and transport
equipment.
64. Roleof PublicSector.About40 centralgovernment
publicenterprises
(CPEs)havebeenoperating
in capital
goodsindustries,
wheretheyhaveplayed
- 33
-
MostCPEshavebeen
machinery).
in electrical
role (particularly
a preeminent
exceptin a few capitalwiththeirprivatecounterparts,
in competition
large
shipbuilding,
and turbines,
products(powergenerators
intensive
telephone
exchanges).
fromthe privatefirmsin following
different
65. CPEshavebeenmarkedly
respects:
(10-12%
investments
(a) CPEsabsorba largeshareof the sector's
due to theirhighercapitalintensity;
abovetheiroutputshare),
bothwagesand
is higherin CPEs,however,
(b) laborproductivity
and
laborcostper unitof outputis alsohigher;
of theirinventories.
forpoormanagement
(c) CPEshavebeenreputed
withtheirhigherlaborcosts,has erodedthe CPEs'
This,combined
wellbelowthatof privatefirms.
profitability
66. CPEscan be dividedintotwo groups. Firstis the CPEsthatwereset up
Secondis the sickprivatefirmsthathavebeentakenover
by the Government.
Some20 CPEs(halfof whichare "takenover"firms)have
by the Government.
whicharemet by Government
depreciation),
cashlosses(before
beenincurring
CPE in the electrical
and subsidies.Therehas beenno cash-losing
advances
about20%of CPEs
CPEsrepresented
subsector.The cash-losing
machinery
between20 and
represented
and advances
subsidies
output,and the Government
of publicand
CPEs. The profitability
25% of the outputof cash-losing
in Table16:
privatefirmsis presented
TABLE16:
PROFIT RATEIN CAPITALGOODSINDUSTRIESIn 1984185
(I Of Output)
Electrical
Machinery
CPEs
Taken-Over Firms
Others (Private)
Overall
-0.1
-2.7
7.9
6.4
Electrical
Machinery
8.1
2.9
19.6
12.7
Transport
EZuiDment
-4.1
-12.7
-0.7
-1.9
NonTotal
Cagital Goods
-3.2
-7.7
10.4
6.4
-
Profitability
34 -
Trends
67. Despitethe low profitability
of the CPEs,capitalgoods industriesas a
whole have had higherprofitability
than the manufacturing
sectoras a whole.
The profitability
ratiosfor capitalgoods industries
are presentedin
Table 17.
TABLE17: INDEX
OF RELATIVE
PROFITABILITY
OF CAPITAL
GOODSINDUSTRIES
/a
1980/81
1982/83
1984/85
1985/86
1.31
1.36
1.08
1.04
0.88
0.97
1.30
1.61
1.59
1.76
1.56
1.65
0.94
0.63
0.92
0.71
1.27
1.19
1.66
1.26
0.80
0.61
1.20
RBISurvey:
GrossProfit
toNetAssets n.a.
NetProfit
to NetWorth
n.a.
1987/88
CMIESurvey:
(Private
Sector):
- AllCapital
Goods:
Profit
to Sales
NetProfit
toNetWorth
- Electrical
Machinery:
Profit
to Sales
La Ratio
of capital
goodsindustries
profit
rateto average
profit
rateinother
manufacturing
industries.
68. The declinein relativeprofitability
in 1984/85and 1985/86was due to
a drasticreductionin machinerytariffsto 45% and 55% respectively.These
tariffswere increasedto 90% in 1987/88. However,even with these drastic
tariffreductions,
the profitability
of capitalgoodsonly declinedto about
the manufacturing
industryaverage. Sincethen, furtherreal devaluation
and
tariffincreaseshave increasedthe profitability
of domesticcapitalgoods
producersabove the overallmanufacturing
industryaverage.
69. Protectionand Trade. QRs on capitalgoodsappearto have been
significantly
liberalized
duringthe 1980s. More than 1,000items have been
put on the OGL list. However,the industryis stillhighlyprotected. First,
most of these OGL itemsrepresentproductsnot manufactured
locally,and OGL
importsrepresented
only about30% of total capitalgoods importsin 1987/88.
Second,most importsof capitalgoodscontinueto requirethe clearanceof the
CapitalGoods Committee. Third,the increasingly
high tariffsleviedon
importedcapitalgoods (officialtariffsin 1987/88averaged90%, and actual
collectionratesaveraged62.5%)have successfully
substituted
for the
- 35 reduction
in QRs in ensuring
thatdomestic
production
wouldsupplyan
increasing
shareof totaldemandfor capital
goods. Table18 presents
the
generaltrendsin foreign
tradefor capital
goods.
TABLE 18:
TRENDS IN FOREIGN TRADE OF CAPITAL GOODS (X)
1973174 1978179 1980/81 1984185 1986/87 1987/88
CIF Imports as
X GFCF in Hachinery
Duties as X Imports
Imports as Z Output
Exports as Z Output
Excise as
Z Output
---
---
14.4
13.3
18.6
16.6
37.4
35.9
5.9
49.4
17.1
6.2
49.1
17.4
4.4
75.2
20.5
3.8
59.8
----
65.4
24.9
2.8
1.5
3.2
---
---
---
7.4
Distribution of Imports by Regime:
- OGL
- Limited Permissible
- Restricted
27.0
21.0
52.0
70. Table19 showsthe trendsin foreign
tradefor disaggregated
components
of capital
goods. The tableshowsthatthe structure
of tradein 1978/79
indicated
the beginning
of specialization
alongthe linesof comparative
advantage
and technological
achievement.
For example,
importand export
shareswererespectively
43% and 13% formachinetoolsand 82% and 15% for
generalelectrical
machinery.In thesetwo groups,Indiawas importing
what
it couldnot produceadequately,
and was exporting
products
whereit had a
comparative
advantage.In mostcountries
withdeveloped
capital
goods
industries,
sharesof bothimports
and exportsare verylarge. Indiain
1978/79
was closerto thesecountries.However,
thistentative
and partial
specialization
disappeared
duringthe 1980sas the resultof policies
for
increased
self-sufficiency
whichlowered
not onlyimports
but alsoexports.
- 36 -
TABLE19:
PATTERIIOF EXTERNAL
TRADEFOR CAPITALGOODS
(as X of Dmomtic Output)
1978179
1980/81
Import EZDort Imaort Ezvort
1984185
Imvort
ExPort
1987188
ImDort Export
Non-Electrical
Machin.
Machine-Tools
27.5
6.2
43.2 13.3
30.3
35.8
5.9
8.4
34.2
28.2
5.6
4.0
22.3
17.5
3.9
5.8
ElectricalMachinery
GeneralMachinery
9.4 6.3
81.7 14.8
4.5
44.4
2.1
0
6.9
25.6
1.8
0
7.1
31.1
1.2
5.5
1.2
TransportEquipment
3.7
1.6
8.6
2.8
6.5
1.0
12.8
TOTALCapitalGoods
17.1
5.4
17.4
4.0
20.5
3.6
14.9/a 2.5
/a
ExcludingProjectImportp. If included,this ratiowould increaseto 24.92.
In conclusion,Indiaincreasedits self-reliance
in capitalgoodsby
increasingits protection,
but it lost the advantagesof specialization
and
most of its exportpotential.
71. Nominaland EffectiveProtection.Pricecomparisons(NPRs)for capital
goods and machineryindicatethat the tarifflevelsexceedwhat would be
requiredto provideprotectionto the domesticindustry.17/Tables20 and 21
show the nominalprotectionratesfor a sampleof 60 capitalgoods.
TABLE 20s NOMINALPROTECTIONRATES (NPRs)FOR CAPITALGOODS/a
ProductGroup
X Sample
Non-Electrical
Machinery
54
Machine-Tools
24
ElectricalIndustrialMachinery
14
ElectricalCables/Wires
3
SmallTelecommanications
Equip
5
Overall(1t60NPRs)
100
Overall
180
157
135
120
121
163
1989
197
/a Plain averages.
17/
The samplesare biasedtowardsnon-electrical
machinery.
1987
172
- 37 -
protection
and effective
in nominal
Thesetablesalsoshowthewidevariation
for outputand inputsand
protection
of nominal
rates. The rangeand medians
are givenbelow. ThemedianNPR for outputis 40%,
protection
of effective
rangesfrom-20%
protection
and themedianNPR for inputsis 70%. Effective
to 585%,withthemedianat about30%.
ANDEPPECTIVEPROTECTION
TABIE 21s RANGEANDMEDIANFOR NOMINAL
(NPRs and EPRs, in Z)
Range
Output
NominalProtectiont
Input
Effective Protection
Median
13 to 317
40
25 to 226
70
-20 to 585
30
withits
bimodal,
is largely
protection
of outputnominal
The distribution
of effective
thedistribution
peakin the 30-50%range. By contrast,
rangeand a
witha firstpeakin the [-10,+10%]
ratesis unimodal,
protection
of at leasttwo
the presence
range.Thissuggests
secondpeakin the [30,50%]
different groups of capital goods industries, a first group receiving low or
negative protection and a secondgroup receiving effective protection similar
to other manufacturing subsectors.
and effective
72. Within each product-group, variations in nominal
for example,
subsector,
can be wideas well. In the machine-tools
protection
haveoutput
lathesandmachine-tools
groups. Standard
thereare two district
between1.15and 1.50,withthemedian
priceratios(NPRs)rangingtypically
and NC machining
suchas CNCmachine-tools
products,
at 1.30. High-technology
priceswhichare 100%or moreaboveinternational
havedomestic
centers,
prices(NPRabove2.0).
betweenthe levelof
correlation
73. Thereappearsalsoto be somepositive
technological complexity and the degreeof inefficiency as measuredby the
Effective Protection rates (EPR), at least for those product-groups where
transfers of technology and foreign collaborations for technology up-dating
have been low.
Whenmoving from steel structures
(simple technology) to
platework structures (pressure vessels, exchangers) and to mining equipment,
- 38 -
the EPR rangesincrease
by 30-40percentage
points.On the otherhand,EPRs
appearto declinewhenmovingto product-groups
requiring
higherlevelsof
technology
suchas machine-tools
and heavyelectrical
powermachinery.These
lattertwo subsectors
havebeenamongthosewhichGovernment
policies
have
allowed
to maintain
an openaccessto foreign
technologies
and collaborations
for continuous
modernization
and technology
updating.
TABLE 22: RANGE OF EFFECTIVE PROTECTION.BY TECMNOLOGICALLEVEL
Product-GrouD
Platework
Mining Equipment
Machine-Tools
ElectricalMachinery
Range of EPR (S)
-10
+33
-20
0
to
to
to
to
+77
+135
+83
+32
A few products
with low EPRs,suchas steelstructures
or standard
machineat competitive
prices(output
NPRs
toolsof stabletechnology,
are produced
rangebetween1 and 1.10), and are exported
whenever
inputsare supplied
at
worldprices.
74. FirmEfficiency
and Effective
Support
Rates. A significant
shareof the
products
analyzed
aboveare produced
by CPEsfromthe non-electrical
machinery
chroniccashlosses
subsector.Someof theseCPEshavein factincurred
(before
depreciation)
covered
by Government
advances
and subsidies,
whichhave
permitted
themto sellat marketprices(dictated
by the competitive
domestic
market)whichare belowtheirshort-term
marginal
costs(STMCs).For this
reason,
effective
protection
ratesdo not provide
a representative
measureof
theiroperating
efficiency.18/
A moreadequate
measure
of efficiency
is
provided
by effective
support
rates(ESRs),
whichadd to the valueadded
permitted
by the traderegimethe amountof subsidies
supporting
the
18/ Anotherreasonwhy EPRswouldnot adequately
measurethe operating
efficiency
wouldbe thepresence
of highprofitmarginsreflecting
monopoly
rentsor otherprivileged
positions.Noneof the analyzed
enterprises
has suchprofitmargins.
- 39
-
productionof the capitalgoods.19/ Consequently,
the data above have been
adjustedto reflectmore adequatelythe efficiencyof the firmsoperating
underthe commonincentiveframeworkof the capitalgoods sector. EPRs of
cash-lossCPEs were convertedintoESRsby incorporating
an estimatedcashloss subsidy.20/
75. The resultsare summarizedby the distributions
of ESRs in Figure1.
The medianeffectiverate of supportis about40%. Again,the distribution
of
ESRs is bimodal,with a firstpeak in the -10, +10% rangeand anotherpeak in
the 30-50%range. However,part of the distribution
has shiftedto the right
towardshigherESRs.
19/
By definition,ESR = (valueadded in domesticpricesplus subsidies)/value
added in international
pricesminus 1. Giventhat some CPES of the sample
have been incurringchroniclossesand that the policyof the Government
has been to keep CPEsoperatingdespitetheirlosses,the subsidieshave
de facto represented
additionalincentive.Addingcash-losssubsidies
to outputvalueand to valueaddedat domesticpricespermitsto compute
nominal support rates (NSRs) and ESRsbased on short-term marginal
costs. A more correct methodology would be to estimate ESRsbased on
long-term marginal costs by adding to cash-loss subsidies the
opportunity
costsof the capitalemployed.
20/
Ideally,the ESR shouldincorporate
a cash-losssubsidyspecificto each
product. Such product-specific
subsidies are not available.
Assuming
that selected products are representative of the enterprises' productmix and operatingefficiency,
the averagecash-lossto outputratiofor
the whole enterprises
was takenas a firstproxy.
- 40 FIG. .1
CAPITALGOODS
0.28
0.26
0.240.220.2
0.18a
0.16
0.14-
Distribution of NPRs,
EPRs,ESCs
S0.12-
0.1
0.080.05
0.04
0.02
Below-10-10to+10
10to30 30toM05to70 70to9O Above90
Legend
ENPC (Nuial Protectlon
Pate) *EPC (Effective
Protection
Iate) 0
ESC(Effective
StwortRate)
76. Structure of Production Costs, by Enterprise Groups The analyses made
above indicate that the capital goods sector, or at least its largest
subsector of non-electrical machinery, comprises three broad groups of
enterprises:
(a)
enterprises
receiving
incentives
foroperating
alonginternational
standards
of practice,
withEPRsin the [-10O,
+10%]range;
(b)
moreprotected
enterprises,
enjoying
EPRsin the [30%,50%]range;
and
(c)
CPEsrequiring
cashsubsidies
for survival
and operating
withhigh
effective
support
rates.
The basiccharacteristics
of the threegroupsof enterprises,
as sumnarized
in
Tables23 and 24, indicate
thateachof thesegroupsis fairlyhomogeneous
(particularly
the firsttwogroups)and has itsown distinct
parameters.
- 41 TABIZ 233 BASIC PARAMETERSOF CAPITAL GOODS ENTPRISES
t Groups Average
Median
NPC
Inout Output
1.69
1.31
1.65
1.33
EPC
1.01
1.02
2nd Group
Average
Median
1.79
1.76
1.58
1.56
1.40
1.42
d Group
Average
Median
1.77
1.76
1.56
1.47
1.61
1.22
Support Coefficients
VA/Output (I)
Nominal Effective Int. Prices
Dom. Prices
n.a.
56
43
n.a.
55
42
n.a.
n.a.
1.89
1.72
2.43
1.62
55
56
58
51
46
40
41
39
TABLE 248 STRUCTURE OF VALUE ADDED IN CAPITAL GOODS ENTERPRISES
(in Z of Output Value in Domestic Prices)
Components
First
Labor
Depreciation
Interest
15.0
5.0
6.5
Enterprise Groups
Second
20.0
4.0
8.5
Thirdla
29.0
4.0
13.5
/a Average structure for cash-losingCPEs in Capital Goods.
77. The combination
of thesevarious
setsof parameters
leadsto the
following
threebasicenterprise
modelswhichrepresent
reasonably
wellthe
threegroupsidentified
earlier.
- 42
TABLE 25:
-
PRODUCTIONCOST STRUCTURESOF CAPITAL GOODSENTERPRISES
(in X of Output in World Prices)
Enterprise
let Group/a
I.P. D.P. NPC/EPC
2nd Group/a
I.P. D.P. NPC/EPC
Output
Inputs: Materials
Services
Total Inputs
100
35
10
45
1.31
1.80
1.30
1.70
10J
33
45
45
55.0 1.00
19.5
8.5
6.5
20.5
N.A.
55
Value Added
55
Labor
Interest
Depreciation
Pre-Tax Profit
(Cash-FlowSubsidy)
131
63
13
76
157
64
16
80
3rd Group/a
I.P. D.P. NPC/EPC
1.57
1.95
1.30
1.78
100
48.5
11.5
60
77.0
1.40
31.5
13.5
6.5
25.5
N.A.
40
150
85
15
100
1.50
1.75
1.30
1.75
50.0
1.25
43.5
20.5
6.0
-20.0
(14.0)
/a NPCs for inputs and outputs and EPCs for value added.
Notes: I.P.: in InternationalPrices, D.P.: in Domestic Prices.
Table25 shows the stylizedcost structuresof the threegroupsof enterprises in both domesticand international
prices. The majordifference
betweenthe firstgroup of efficientfirmsand the othertwo groups is in
laborand interestcosts. Laborcost differenceis partiallycausedby
inefficient
technologies
and partially(especially
in CPEs)by overstaffing.
Higherinterestcosts,especiallyin the thirdgroup,reflectthe accumulated
lossesof these enterprises.
78. Impactof Trade Reformon Profitability
of CapitalGoods Industries.
The liberalization
of capitalgoods importsand the progressive
dismantling
of
the uneventariffstructurewill have differentimpactson the viabilityand
profitability
of the sector'senterprises,
dependingon the type of
enterprises
and theirpresentlevelof efficiency.The impactof trade
liberalization
is dictatedprimarilyby: (a) the levelof effective
protection/support
enjoyedby the enterprise,
and (b) the breakdownof the
enterprise's
valueadded betweendifferentcost components(labor,interest,
depreciation)
and grossprofit.
79.
Assuminga generaltrade reform,i.e.,removalof QRs and progressive
reductionof tariffsto free-tradeover five periods(whichcould be five
years),the nominalprotectionfor capitalgoodsand the resultingoutput
-
43 -
price ratioswhich the threeenterprisegroupswould have to competewith, are
given in Table26.21/
TABLE 26t EVOLUTIONOF CAPITAL GOODSRELATIVEPRICES UNDERFREE-TRADEREGIME
Average Actual Tariff (Z)
Relative Output Prices:
1st Group
2nd Group
3rd Group
Present Year 1
75
50
1.31
1.57
1.50
1.31
1.50
1.50
Year 2
37.5
Year 3
25
1.25
1.375
1.375
1.25
1.25
1.25
Year 4
12.5
1.125
1.125
1.125
Year 5
0
1.00
1.00
1.00
It is assumedthat: (i) the averagetariffsactuallycollectedon imported
capitalgoodswould be unifiedand, afteran initialreductionof 25
percentagepoints in the firstyear, reducedover 5 years to zero: and
11) that the presentconditionsof localcompetition
would continueto
prevail,thus keepingcurrentpricesat theirpresentlevelsuntilthe lowered
tariffsstart "biting"and force enterprises
to adjustpricesdownwardsto
international
levels. It is also assumedthat protectivetariffson materials
and other physical inputs would, under the general tariff
reform, be gradually
reduced to zero, and reduction on input costs would begin in the first year of
reformprogram. Table 27 presentsthe likelyoutcomesof the reformprogram,
on the three groups of enterprises, without any enterprise structuring or
efficiency improvements.
21/
The sequencing presented here is purely illustrative.
designalternative
phasingoptions.
It is possible to
-
TABLE273
44 -
TRADEREFORMSCENARIOFOR THREE GROWUPS
OF CAPITAL GOODSPRODUCTS
(in Z of World Output Prices)
Present
Year 1
Year 2
Year 3
Year 4
Year 5
112.5
41
13
54
100
35
13
48
GROUP1
Output
Inputs: Materials
Services
Total
Value Added
Labor
Interest
Depreciation
Pre-Tax Profit
(as X of Output'
131
63
13
76
55
19.5
8.5
6.5
20.5
15.6
131
57.5
13
70.5
131
52
13
65
125
46.5
13
59.5
60.5
66
65.5
58.5
52
---------------Unchanged-----------------------------Unchanged----------------Unchanged--------------26.0
31.5
31.0
24.0
17.5
19.8
24.0
24.8
21.3
17.5
GROUP 2
Output
Inputss Materials
Services
Total
Value Added
Labor
Interest
Depreciation
Pre-Tax Profit
(as I of Output)
157
64
16
80
77
31.5
13.5
6.5
25.5
16.2
150
58
16
74
137.5
52
16
68
125
46
16
62
112.5
40
16
56
100
33
16
49
76
69.5
63
56.5
51
---------------Unchanged------------------Unchanged-----------------------------Unchanged--------------24.5
18.0
11.5
5.0
-0.5
16.3
13.1
9.2
4.4
-0.5
GROUP 3
Output
Inputst Materials
Services
Total
150
85
15
100
150
77.5
15
92.5
Value Added
Labor
Interest
Depreciation
Pre-Tax Profit
50
43.5
20.5
6
-20.0
57.5
52.5
47.5
42.5
36.5
-Unchanged-----------------------------Unchanged------------------- -Unchanged---------------12.5
-17.5
-22.5
-27.5
-33.5
Memo Item: Cash-Flow Subsidy
(14.0)
(6.5)
137.5
70
15
85
(11.5)
125
62.5
15
77.5
(16.5)
112.5
55
15
70
(21.5)
100
48.5
15
63.5
(27.5)
80.
Due to the one-two year time lag between the binding impact of the
respective tariff
reductions on output and inputs, the profitability
of
*unprotected* firms (Ist Group) increases during the first three years before
reaching a level that is higher than they currently
enjoy/.
Similarly,
the
-
45 -
cash-losing enterprises (3rd Group) see a temporary decrease in their losses
during the first two years before their losses and the corresponding subsidies
increase
markedly;
theyshouldusethistwo-year
respite
for restructuring
purposes.The secondgroupof enterprises
has its highprofitability
eatenup
as of the firstyearby the lowering
of itsoutputprotection,
downto a
slightly
negative
profitability.
The following
tablesummarizes
the results
of Table27.
TABLE 28s PROFITABILITYOF CAPITAL GOODS ENTERPRISESUNDER TRADE REFORM
(Pre-TaxProfit to Output Value, In 2)
1st Group
2nd Group
3rd Group
(Cash Subsidy)
Present
Year 1
Year 2
Year 3
Year 4
Year 5
15.6
16.2
-13.3
(9.3)
19.8
16.3
-8.3
(4.3)
24.0
13.1
-12.7
(8.4)
24.8
9.2
-18.0
(13.2)
21.3
4.4
-24.4
(19.1)
17.5
-0.5
-33.5
(27.5)
81. Restructurina
Scenarios
for Maintained
Production22/
The existing
enterprises
of the 2nd and 3rd groupswouldhaveto undertake
restructuring
measures,focused primarily on theirlaborcostsand on and interest
charges,
if theyare to restore
theirprofitability
rates(2nd group) or at least
operatewithout
Government
cash subsidies (3rdgroup). Achieving
a profit
rate of 17.5%in the 2nd group,(theprofitability
levelof the 1stgroup)
wouldrequire
cutting
downprimarily
on laborcosts. In orderto alleviate
somewhat
the socially
painfullaboradjustment,
interest
chargescouldalsobe
reduced
to a levelsimilar
to thatin the 1stgroupenterprises.
The
resulting
production
coststructure
wouldevolveas follows:
22/ The following
paragraphs
are considering
restructuring
scenarios
in
thosecaseswhereseparate
enterprise-specific
diagnoses
haveconcluded
aboutthe economic
undesirability
to expandor diversify
the production
capacity
of the enterprise
underreview.In manycases,however,
the
diagnosis
wouldbe to expandsomeof the existing
production
lines
and/oropennewones,withadditional
investments
to be carefully
identified
and assessed
by enterprise
restructuring
programs.
Suchcases
of expanded/diversified
production
falloutsidethe purpose
of this
note,whichaddresses
essentially
the caseof enterprises
whichare in a
positionto consider
onlytwooptions:(a)How to keeptheirexisting
production
linesoperating
profitably
underthe new protection
framework,
withoutsubstantial
new investments;
(b)or closedown.
- 46 -
TABLE 29s RESTRUCTURINGSCENARIO FOR EtISTING XNTRRPRISESOF THE 2ND GROUP
(in Z of World Output Price)
Value Added
Labor
Depreciation
Interest
Pre-Tax Profit
(asZ Output Value)
Present
77
31.5
6.5
13.5
25.5
16.2
Year 1
Year 2
Year S
Year 4
Year 5
76
69.5
63
56.5
51
31.5
28.7
24.9
21.0
19.5
-----------------Unchanged--------------13.5
11.5
10.5
9.5
8.5
24.5
22.8
21.1
19.5
17.5
16.3
16.6
16.9
17.2
17.5
Interest
charges
needbe reduced
by aboutone-third,
and laborcostswould
haveto be cut by morethanone-third
(about38% of theirpresentlevel).The
adjustment
costsfor theseenterprises
wouldbe substantial,
but manageable.
82. The cash-losing
CPEsconstitute
a moredifficult
casefor restructuring.
Firstly,
an in-depth
and targeted
approach
shouldbe taken,wherebya
comprehensive
diagnosis
of eachenterprise/plant
situation
and potential23/
shouldbe carriedout and leadto enterprise-specific
restructuring
plans
considering
threealternative
decisions:
(a) investfor long-term
rehabilitation
and/orcapacity
expansion;
(b) keepopenand operatein the short-run
withworkingcapital;
or
(c) disinvest/close
unproductive
assetsthroughsimplified
bankruptcy
and
exitprocedures.
Thoseunitsassessed
to remainpotentially
uneconomic
shouldexit. Restructuringplansfor theotherunitswouldbe developed,
whichwouldinvolve
strategic
decisions
on trimming
unprofitable
productlines,physical
and
financial
restructuring,
laborshedding
and improved
management.
23/ The diagnosis
and restructuring
plansshouldassessoverthe shortand
medium-term
eachenterprise's
situation
and prospect
regarding
markets,
competitiveness,
product-mix,
organizational
and corporate
structure,
labor force,investments,
financial
structure,
and financial
and
economic
viability.
- 47 83. The minimalobjectiveof achievinga zero ofit in those unitsto be
kept open for continuingoperation(withoutmajor new investments)
would
require:
(i)
financialrestructuring
at the outsetwith a view to reduce
financialchargesto a levelclose to that in other enterprises,
primarilythroughpartialwrite-offof the debt owned to the
Government;
and
(1t) substantial
reductionof laborcosts throughearly retirement
schemesand othermeansof sheddingexcess labor.
The restructuring
scenariocouldbe as follows:
TABLE 30s RESTRUCTURING
SCENARIOFOR CASH-LOSINGENTERPRISES (3rd GROUP)
(as X of World Output Price)
Value Added
Depreciation
Interest
Labor
Pre-Tax Profit
Cash Subsidy
Cash-Flow
Present
50
6
20.5
43.5
-20.0
14.0
-14.0
Year 1
57.5
---15.5
39.0
-3.0
Year 2
52.5
Year 3
Year 4
Year 5
47.5
42.5
36.5
Unchanged---------------14.0
12.5
11.0
9.5
34.5
30.0
25.5
21.0
-2.0
-1.0
0
0
--
--
--
3.0
4.0
5.0
6.0
6.0
Interestchargeswouldbe reducedinitiallyby one-fourth(througha first
debt write-off)and subsequently
by anotherone-third. Laborcostswould have
to be reducedby more than half to about48% of theirpresentlevel. The
restructuring
programswould have to balanceand arbitratebetweendebt writeoff and laborshedding: the more debtwritten-off,
the less laborshedding
required.
84. These resultsclearlyindicatethat significant
restructuring
is
necessaryto achievea competitive
and efficientcapitalgoods industry. The
scenariosdevelopedhere have focusedprimarilyon the negativeeffectsof
trade reformand on enterprises
that are likelyto be negativelyaffected. It
is equallylikelythat most of the efficiententerprises
would expandtheir
markets,both internaland external. Furthermore,
domesticdemandfor capital
goodswould expandwith the decreasein its relativeprice. Realdevaluations
- 48 reforms
wouldalsominimizesomeof
the proposed
thatare likelyto accompany
are likelyto be less
the net effects
costs. Therefore,
the adjustment
above.
thanoutlined
negative
E. CONCLUSIONS
goodsand key
on capital
85. The policyof hightaxesand tariffs
in Indiaacrossa wide
the costsof production
haveescalated
intermediates
has
of protection
At the sametime,thisstructure
spectrum
of industries.
sectoras a whole.
protectionto the industrial
ledto much lowernet average
unplanned
variance
in net EPRswherehalf
However,
it has createdtremendous
highly
whilethe otherhalfreceives
highlypositive
receives
the industry
landedpriceof imports(especially
negative
net EPRs. The policyof keeping
firms
domestic
pricesalsohas induced
higherthandomestic
for intermediates)
of comparative
advantage
to entertheseareasirrespective
of considerations
in turn
investments
Theseuneconomic
competitiveness.
and international
and highercostsof production
for all
generate
furthertariffescalation5
downstream
Industries.
On the otherhand,thederegulation
of industry
has tendedto lowerthe
of supplysurpluses
excessentryand creation
through
on some
EPRs. The deregulation
seemsto havegreaterimpactprimarily
in intermediates
and othercapital
consumer
and capital
goods. However,
the same
competition
doesnot seemto haveachieved
goods,domestic
of theseproducts
and
results.24/
First,Indiais stilla largenet importer
(due
rapidgrowthin manufacturing
willbe so for sometimeto come. Second,
and excessive
domestic
demand)haveledto growingimports
to deregulation
Third,these
supplyof intermediates.
despiterapidgrowthof domestic
are highlycapitalintensive
whichmakesentrymoredifficult
and many
sectors
for publicsector.
and/orreserved
tightly
are licenced
of theseproducts
and acrossthe
Whatis neededin thesesectorsis more importcompetition
for
whichwouldlowerthe costsof production
boardtariffand tax reductions;
industries.
all downstream
24/
thisobservation.
havecorroborated
growthstudies
Recentproductivity
(TFP)growthhas
productivity
total
factor
estimates,
to
these
According
the TFP growthhas
duringthe 1980s. However,
increased
dramatically
goodsversus
1.4Xp.a.for intermediate
beenlowestfor intermediates;
goods(Ahluwalia,
goodsand 3.4Xfor capital
about6X p.a.for consumer
1991).
- 49 86. Importsubstitution
in intermediates
has beencomplicated
by the
response
of Government
to international
pricefluctuations.
By the natureof
worldmarkets,international
pricesof intermediates
suchas steelor
chemicals,
are highlycyclical.In the nameof pricestability,
the Indian
Government
adjuststariffs
and QRs to maintain
the highprotection
in the
economy.When international
pricesrise,the tariffsare sometimes
maintained
for revenue
purposes;
leading
to the ratcheting
up of tariffs. On the other
hand,whenworldpricesdecline,
tariffs
are raised.Thisleavesthe
exporters
(whichare mostlydownstream
industries)
withmuchhighercoststhan
theirforeign
competitors
thathaveaccessto cheaperraw materials.21/
This
is whathappened
to engineering
industries
in the early1980swhenworldsteel
pricescollapsed.Morerecently,
declinein international
aluminum
prices
haveledto a similar
adjustment
wherealuminum
was movedfromOGL to the
Restricted
list;leading
exporters
of aluminum
products
to ask for IPRS
benefits.A similar
dangerawaitsusersof petrochemical
products
if the
existing
highworldpricesdecline.It is veryimportant
thatdomestic
producers
of key intermediates
be induced
to adjustto international
price
fluctuations
to maintain
the competitiveness
of the restof the economy.
87. It alsoappearsliterally
impossible
to bringIndianpricescloserto
worldlevelswithoutsubstantially
lowering
the costsof investment.
Mostof
Indianindustries
are in needof modernization
and wouldneedsignificant
investments
to expandexportsandmeetgrowing
domestic
demand. Investments
madewithexisting
highcapital
costswillpermanently
handicap
these
industries
relative
to theircompetitors.
88. Giventhe magnitude
and variance
of effective
protection
ratesit is
clearthatanything
shortof low and uniform
tariffs
and complete
elimination
of QRs wouldnot bringtransparency
to the incentive
regimefacedby the
industrial
sector.The evidence
suggests
thatthereis amplescopefor
significant
reductions
in tariffs
and QRs andmostindustries
can coexist
with
much lessprotection
thancurrently
given. Theelimination
of all surcharges
on inputs(tariffs
on imported
inputs,
pricedifferentials
on localones,nondeductible
excisetaxes)indicates
that,evenwithout
correcting
for the
21/
In theory,exportcompensation
systems
shouldautomatically
adjustfor
pricedifferentials,
but thisrarelyhappens
in practice.
-
50 -
effects
of highinvestment
costs,mostprojects(including
the importsubstitution
ones)wouldearnfromthe currentinternational
pricesa positive
profitmarginon theirmarginal
as wellas fullproduction
costs. The proportionof projects
withsucha positive
profitmarginwouldtriplefrom20% to
63%. Amongthe import-substituting
projects
whichhaveno prospects
nor
potential
for exportunderthepresenttraderegime,
thisproportion
wo:'ld
increase
dramatically
from0 to 50% if theycouldprocuretheirinputsat
international
prices(Ettori,
1990).
89. The lowertariffs
wouldfulfill
moreeffectively
theirprimarypurpose
of providing
protection
and incentive
signals,
anddisregard
theirsecondary
function
of publicrevenue
generation
whichin Indiahas becomepredominant
and introduced
pervasive
distortions
in pricesand incentives.
The function
of publicrevenue
generation,
whichis currently
anothercritical
issuein
India,shouldbe fulfilled
by othermoreefficient
and protection-neutral
instruments,
in particular
directtaxation(income
tax)and non-tariff
indirect
taxation(neutral
excisetaxes,MODVAT,andpreferably
the
consumption
VAT).
REFERENCES
Ahluwalia, I.J. (1991).
Productivity
Trendsin IndianManufacturing,
Forthcoming, New Delhi.
Aksoy,M.A. and Tang H. (1991).
NImports,Exportsand IndustrialPerformance
in
India:.1970-88,"World Bank,Processed(April).
Ettori,F.M. (1990). "ThePervasiveEffectsof High Taxationof CapitalGoods in
India,"PRE WorkingPaper433, World Bank.
Economyin Transition.
India: An Industrializing
Hansen,J.R. et. al. (1989).
Washington,D.C.: The World Bank.
Joseph,K.J. (August19,1989).
"GrowthPerformance
of IndianElectronics
under
Liberalization,"
Economicand PoliticalWeekly.
Mitra and Go (1992).
"TradeLiberalization,
FiscalAdjustmentand ExchangeRate
Policy: A Methodological
Illustration
usingIndianData,"The World Bank,
Forthcoming.
Pursell,G. (1988). Trade Policiesand Protectionin India,World Bank,Draft,
August,Washington,D.C.
Policy Research Working Paper Series
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SupriyaLahiri
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AreaMayAffectInternational
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Lossesfrom
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for Egypt
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Author
Date
EstelleJames
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CharlesR. Blitzer
and MethaneEmissionsWouldAffect R. S. Eckaus
the IndianEconomy
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Title
WPS977 IncomeSecurityfor Old Age:
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