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July 1, 1999


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Business Commentary/Bibek Debroy

No harm in allowing free imports of consumer durables

Before 1991, India's imports were divided into four categories -- open general licence or OGL, restricted, prohibited and canalised. OGL meant no licence was required, restricted meant an import licence was required, prohibited items were banned and canalised items could only be imported through a designated state trading agency.

The reforms added a fifth category -- the special import licence or SIL list. SILs are import licences granted to specific categories of exporters as an indirect export subsidy and can be used to import specific items on the restricted list. Since SILs can also be hawked on the market at a premium, they constitute an indirect export subsidy.

The commerce ministry now follows the eight-digit harmonised classification system and under this, around 10,500 items (or tariff lines) are described. Estimates show that before 1991, around 8,000 of these faced import licensing.

Such quantitative restrictions (QRs) are prohibited under GATT (General Agreement on Tariffs and Trade) or the WTO (World Trade Organisation) stipulations. India got away because of Article XVIIIB of GATT, which permitted deviations from this prohibition if a country faced Balance of Payments problems.

It is very difficult to argue that India has BoP problems now. So although it still has Article XVIIIB status, the QRs will have to be eventually phased out and everything (except a small negative or prohibited list) will be on OGL.

In fact, since reforms started, some transition to OGL has been taking place -- sometimes directly to the OGL, sometimes first to the SIL list and then to the OGL. As compared to the pre-1991 figure of 8,000, around 2,000 items are on QRs now. (The commerce ministry has a lower figure, but that is because it only counts restricted items, not the others.)

In addition, India has bilateral agreements with trading partners like Australia, Japan and the European Union, as a result of which, QRs will be phased out by March 2003. Although these agreements are on a bilateral basis, by the MFN (most favoured nation) principle, they will have to be extended to all WTO members. A dispute with the United States on the QR issue has also yet to be resolved.

The simple point is that after March 2003, QRs will be scrapped. This does not mean duty-free imports, as relevant duties will have to be paid. But everything will be on OGL. If one looks at the QR regime today, one finds that import restrictions characterise five major product groups -- agricultural items, petroleum and products, urea, textiles and garments and consumer goods.

The dicey one is consumer goods. Even though it is very difficult to define what is a consumer good and what is not (I have been racking my brains about whether a cow is a consumer good or a capital good), the Left is up in arms because consumer goods are elitist.

How can you allow these to be imported and squander away precious foreign exchange? For some strange reason, these items cease to be elitist if they are produced by inefficient domestic producers who charge high prices, offer shoddy quality and bad servicing.

But this is perhaps where nationalism comes in. For patriotic reasons, we should be delighted if we are exploited by domestic Indian companies, but we should resist exploitation if a multinational is involved. What is elitist and what is not is of course impossible to determine.

There is the cliched story of a detergent manufacturer who was planning to introduce a new variety of detergent (in 1989) and looked at figures of sales of washing machines (an elitist item) in India. The detergent manufacturer found that 70 per cent of washing machines were being sold in the Punjab. And when a team was sent down to find out what was happening, the team found that all these washing machines were being used for making lassi (buttermilk), a non-elitist function, and not for washing clothes, an elitist function.

To come back to the point, the resistance to consumer goods import liberalisation is supported not only by the Left, but also by Indian industry. From the policy point of view, if you don't liberalise imports, the domestic market continues to be protected from import competition and is artificially profitable. Therefore, this distorts resource allocation and investments (domestic and foreign) in favour of catering to the protected domestic market rather than sourcing for the export market.

Is it very surprising that not very long ago, automobile manufacturers in India were trying to hawk 15-year-old models that would not be bought anywhere else?

Quite understandably, industry is not bothered about such policy issues. It wants to protect its own turf. Therefore, lobbies have begun to surface.

Admittedly, QRs cannot continue beyond March 2003. But why not set high enough duties? 150 per cent, if not higher. After all, India's present duty commitments (reduction and bindings) to the WTO do not extend to consumer goods. These lobbies are particularly active for cigarettes, liquor and automobiles.

Automobile manufacturers are scared stiff about possible imports of second-hand cars.

I see nothing wrong with imports of second-hand cars at reasonable rates of duty, not 150 per cent. The more the competition, the better it is for the consumer.

Before Maruti entered in the mid-1980s, most Indians were driving around in four-wheeled contraptions that would not be recognised as cars anywhere else in the world.

The ubiquitous Maruti-800 has been around for almost 15 years now. But for 14 years, everyone knew that you could insert a scale through the window-lining and unlock the car. Because there was no competition in that segment, Maruti saw no particular need to change the lock. It is only now, after the threat of competition, that locks have been changed.

Even now, because of high capital costs, there is virtually no competition in the 800 cc engine segment. I doubt that imports of second-hand cars are ever going to be that important quantitatively. However, in principle, they can offer competition in the 800 cc segment.

Rather remarkably, the automobile manufacturers who are most vociferous about not allowing imports of second-hand cars, are some who entered after 1991. The managing director of Daewoo recently said, "You must protect domestic industry. We will not have adequate volumes to exploit economies of scale if you allow imports of second-hand cars. Why waste foreign exchange on imports of cars when we can produce cars domestically? The consumer will be exploited as he is unfamiliar with technology and brand names and will import sub-standard cars. We are becoming Euro-I and Euro-II compliant. Imported cars will not satisfy these norms (as if these norms can't be applied to imports) and will cause environmental pollution."

Had there been any truth in these arguments, we should not have allowed Daewoo entry either. We should have been perfectly happy driving around in Ambassadors and Fiats.

But there lies the rub. The general attitude of industry is, liberalise for me, but do not liberalise for anyone else. The problem is that consumers are diffused and do not have cohesive lobby groups. The consumer's voice is a voice in the wilderness. And we all know what happened to the voice in the wilderness. His head was chopped off.

Consumer goods manufacturers keep saying that the consumer is the king. Perhaps. Those of us who play chess (remember that chess supposedly originated in India) know that the king is the least powerful of the pieces. I wonder how we can lobby to permit imports of second-hand cars.

Bibek Debroy

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