Growing up in the 80s, one of the several career options I had considered was that of a smuggler. That I ended up doing the tired Engg+MBA routine is emblematic of how far I have fallen from the idealism of those heady days. Now, the choice of the smuggler as a role model was backed by ‘big data’ of those times. The multiple smugglers onscreen in Hindi movies wore sharp suits, drank Scotch, smoked cigars and had vivid, luminous dens fitted with various sinister, hidden contraptions. He (yes, it was always a he) had fast cars, faster girls and a Chinese henchman who could disembowel you before you could make Maggi. In summary, he embodied coolth before even the word was invented.
The reason I couldn’t be a smuggler wasn’t just a matter of me straying into lesser exalted careers based on the usual bad advice that your family and friends dish out to you. There was another minor problem by the time I was ready to join the labour force. Smuggling as a profession had disappeared; swept away by the economic reforms of the 90s, the reduction in import tariffs and the opening up of the economy. Well, I gave my dreams a quiet burial, blamed Manmohan Singh (like I have done ever since) and went on with life.
The past few years however have given me hope. The apparent lack of employment choices for a villain in Hindi cinema has spurred the Government into action. It has, over the past 18 months, increased import duties on things as varied as ACs, display panels, shoes, circuit boards and mattresses. The extent of increase has been substantial – in the range of 500 bps to 2000 bps (1 bps is one-hundredth of 1%). For instance, the import tariffs on fans, toasters, mixers etc have gone up from 10% to 20%. The underlying idea here is to boost the Make in India initiative and increase domestic value addition capacity in these areas. Well, this harking back to the days of import substitution and protectionism is the ‘seen’ effect. The ‘unseen’ effect, of course, is my son can soon be inspired by onscreen smugglers like I was during my childhood. And, hopefully, if the likes of Manmohan Singhs stay away from power, he (my son; not Manmohan Singh) will grow up to be a smuggler and lay to rest the ghosts of my unfulfilled ambitions. What a modern Shravan Kumar story that will be!
I know the doubting Thomases (and Tushars – to keep things secular here) among you might be wondering about these unseen effects of the rise in imports tariffs. First, let’s get the few exceptions where an import tariff might be justified out of the way. Many of these items aren’t needed for national security nor do they belong to sectors that might be considered ‘sunrise’ globally. Now, let’s see how this will play out for items like printed circuit boards (PCBs) or batteries that go into a mobile phone or a tablet.
First, let’s get a sense of the PCB landscape in India. The supplier base for PCBs in India is quite small. For instance, Fine-Line Circuits Ltd which is one of the few listed manufacturers and is considered among the top 10 PCB manufacturers in India had annual revenue of a mere Rs. 31 Crs for FY 19. The industries which use PCBs, however, are diverse and large, including consumer electronics (mobile phones, tablets, TVs), LEDs, medical devices, auto and aerospace components, defence systems and telecom equipment. Clearly, the industries that use PCBs for their final product is huge and India has significant export revenues already being generated from these sectors. I’m sure we’d like the exports to go up in these sectors in future.
Now, the almost 30% increase in import tariff will increase the cost of PCBs in the domestic market. The absence of a large supplier base will mean it won’t be easy for many industries that use imported PCBs to change to domestic suppliers. Also, remember setting up a PCB plant or increasing capacity isn’t easy and the domestic PCB suppliers won’t be able to scale 10-20X over the near future no matter how entrepreneurial they are. In the short run the Government earns import duties as revenues from this move. But fairly quickly, the domestic costs of production for phones, TVs, LEDs, medical devices will increase, and these costs will get passed on to the end consumers of these products. So, a Karbon or a Micromax that makes mobile phones in India will have to increase their prices while already lagging the Chinese manufacturers in terms of features. Further, a Karbon or a Micromax will have to cede ground in international markets where they compete with Chinese firms as they become more expensive. Eventually, the lack of credible domestic competition in many of these sectors will provide incentives for foreign firms to increase their prices in India which will directly impact the end consumers.
Also, the Indian PCB manufacturers who have been upping their game while competing with foreign firms will have limited incentive to do so now. This will reduce their competitiveness and eventually won’t have the market driven need to focus on innovation and quality. There will be shortages and fall in quality in the domestic PCB market.
The upside of all of these (for me) is these will eventually lead to the emergence of a ‘black market’. There will be intrepid players (smugglers) who will bring in foreign PCBs to the domestic markets through various channels evading the custom duties and supplying them to buyers at a price that will be below the legal imported price. There’s an economic rationale for this and as our experience suggests if that exists, the market will find players who will fill the gap.
Now, this is just one item (PCB) among a host of 50 plus items that have had their custom duties raised. When you play out the scenarios for each of those items, you will find the proverbial ‘let a thousand smugglers bloom’ (with no apology to Mao) scenario come true over time. The smuggler will come back to national consciousness and my son will sing Papa Kehte Hain Bada Naam Karega while devising ways to unload the ‘maal’ on the beaches of Karwar coast on an Amavasya night. The circle of life will be complete.