Favouring importers

Though packaged as an anti-inflationary measure, the decision to scrap the 16 per cent countervailing duty and 4 per cent special additional duty on the import of cement appears to be an act born of some petulance. It is unusual, if not extraordinary, to waive duties on imports that are essentially meant to neutralise domestic imposts on manufacturers""the countervailing duty, for instance, is usually a mirror of the excise duty rate. Waiving the first and not the second conveys the clear message that the government wants to put domestic producers at a disadvantage when they have to compete against imports. A more charitable explanation might be that cement imports are not viable because of high transport costs, and the government is merely seeking to help increase supply so that the demand-supply balance in the domestic market is restored. Even if this were the more accurate reading of the government's intentions, it is hard to see similar steps being taken in other sectors where manufacturers may have raised prices. For instance, would the government waive import duties on cars because local manufacturers raised prices after the Budget? Or offer a subsidy on steel imports because steel prices have been climbing?

It should be obvious therefore that this latest gambit in the government face-off with the cement industry is the result of a sense of aggravation. The story starts with the introduction of the dual excise duty structure, which did not have the intended effect of lowering cement prices; nothing much came out of the government's subsequent meeting with the industry on holding prices, other than a promise that manufacturers would hold the existing prices provided there were no other increases in raw material costs.

If the government is so keen on controlling inflation that it is willing to forego tax revenue (as it did in the case of petroleum products a few months ago), it could easily scrap the dual excise structure, which began the whole problem, and there would be nothing wrong in admitting frankly that the tactic did not work. It could also offer excise incentives for additional cement production, or match the waiver of countervailing and other import duties with excise rebates. That it has done none of these, and chosen instead to be partial in its approach, makes it fairly obvious that the tax waivers on imports are so designed as to discipline what the government sees as a recalcitrant and defiant industry.

The larger point when it comes to fighting inflation is that rising prices can be addressed through a more aggressive tariff-cutting exercise across the board. There is plenty of room for this, and it would certainly sharpen competitive forces in an even-handed manner. The other policy option, since cement industry cartelisation has been whispered about, is to activate the Competition Commission (which has been non-functional for the best part of three years) so that it can go after price collusion. In ignoring these options and seeking more whimsical methods to tackle the problem, the government is giving out a very wrong message about the rules by which India's markets are allowed to function. The price of interventionist misadventure is now being paid in sugar, whose exports were banned when global prices were at a peak, only for various state governments to now offer subsidies to sugar companies because they are holding excess stocks that they were not allowed to export earlier. When such aberrant conduct enters the decision-making matrix, it affects fresh investment and thereby retards future supply. Surely that cannot be the government's intention.