India’s restrictive trade and regulatory actions can harm its industry and damage investment
GCC countries and India have long-standing trade ties dating back hundreds of years. In recent years, the regional petrochemical and chemical industry has actively contributed to India’s economic growth and development. GCC chemical producers supply essential raw materials to important segments of India’s domestic manufacturing value chains, including healthcare, building and construction, automotive, information technology, textiles, and agriculture. All these sectors contribute immensely to India’s impressive growth and job creation. They will also be central pillars in the country’s economic recovery from the ongoing COVID-19 pandemic.
According to Indian Government statistics, in 2019 imports into India from the GCC stood at USD 25.5 billion (non-oil imports) and GCC countries exported 11.15 mt (million tons) of chemicals and plastics to India. This amounted to USD 6.52 billion or 25.67% of all non-oil GCC exports to India.
Source: UN Comtrade
India’s trade priorities
Promoting Investment into the country has been a key objective of the Narendra Modi government. 100% of foreign direct investment (FDI) is allowed under the automatic route (where the non-resident investor or the Indian company does not require any pre-approval from the Government of India) in the chemical industry (except for hazardous chemicals). However, this has not resulted in attracting substantial foreign investments. Even when FDI inflows into India have been growing steadily over the last few years, the chemical sector attracted only 9% of total FDI.
Another priority area for the Indian government in recent months has been the modernization of the World Trade Organization (WTO). As one of the fastest growing economies, India is assuming an important role in world trade. The country’s leadership is keen for developing economies to have a bigger say in the governance of the WTO and wants to uphold the principles and agreements of the multilateral system including obligations on fair national treatment.
Concerns about proposed trade measures
Recently the Indian government has proposed new trade-restrictive measures. The measures, which are protectionist in nature, include raising import tariffs; introducing anti-dumping and countervailing duties, mandatory standards and conformity assessment protocols for imported chemicals, and a comprehensive chemical management regime. A number of countries, including the GCC states, have raised concerns about these measures at the WTO.
India’s newly introduced trade measures could disrupt its manufacturing value chains through higher costs and reduced availability of key inputs of raw materials, building-block chemicals, and specialty chemicals. They would also serve as disincentives for foreign companies seeking to invest and manufacture in India. In the long term, they may also damage India’s leadership at the WTO by contravening commitments, while in the short term, they may put a strain on economic growth during the critical recovery period. Below we provide some perspectives on each of these issues:
In the first half of 2020, the Ministry of Chemicals and Fertilizers presented to the Ministry of Commerce and Industry a proposal to impose an across-the-board 15% additional duty on all imports of chemicals and plastics with the stated objective of protecting India’s domestic chemical industry and fund its COVID-19 response efforts*. These proposals relate to concerns about over reliance on imports, but this broad approach could promote “import substitution” through the import of intermediate or finished goods, in the short term, further injuring the interests of the domestic convertors and downstream industries. This could also leave a negative, lasting impact on the entire manufacturing value-chain.
Higher tariffs on chemicals can have several adverse effects on India’s businesses and people. Chemicals are essential inputs to agricultural production, healthcare, pharmaceutical, and almost all manufactured goods, which means that higher tariffs will lead to higher costs and less supply and result in a drop of the competitiveness of the Indian industry. Higher tariffs will also undermine India’s goal of attracting more FDI into the country. They will also negatively impact the broader downstream industries (majority of which are small and medium sized businesses), their production of key consumer goods, and growth of their workforces. Furthermore, any imposition of duties more than the bound tariffs would infringe India’s WTO obligations.
*This proposal was rejected. However, it should be noted that India is not a signatory of CTHA and can increase the tariffs as it deems fit.
Proposed actions by the Indian government
Trade remedy measures
India is by far the largest user of the trade remedy instruments. In 2019, it initiated 52 anti-dumping investigations, up from 32 in the previous year, and in H1 2020, it initiated 57 investigations. Anti-dumping actions should only be pursued in exceptional circumstances, and anti-dumping measures should only be imposed in strict compliance with WTO rules. They should not be imposed with a protectionist intent to protect domestic industries. Decreasing the availability of supply, especially for certain specifications of chemicals, could significantly handicap downstream industries, itwill raise costs, harm their competitive markets, and increase costs for local Indian consumers.
Mandatory standards and conformity assessment regime for imported chemicals
Since 2018, the Government of India, through the Bureau of Indian Standards (BIS), proposed to make mandatory a suite of voluntary domestic standards for chemicals. It has since then notified 25 proposed mandatory standards for specific chemicals to the WTO Committee on Technical Barriers to Trade (TBT Committee). Under this potentially trade-distorting scheme, chemicals face much more burdensome conformity assessment procedures. India will ban imports of chemicals that do not comply with Indian Standards (IS). Ensuring compliance under this approach would require significant resources from the Indian government and would also create further blockages and supply chain disruptions.
Comprehensive chemical management regime
In December 2019, the Government of India proposed to establish a chemicals management regime*. The proposed regulation, Draft Chemicals (Management and Safety) Rules, 20xx, applies to all substances, substances in mixtures and intermediates that are manufactured, imported, placed, or intended to be placed in an Indian territory >1 ton per year. It requires manufacturers, importers, or authorized representatives to notify new and existing substances and register substances that need registration. Restriction or prohibition of uses of certain substances may be required if they are evaluated and found posing unacceptable risks to human health and the environment. As drafted, the proposed regime would impose higher upfront compliance costs on both domestic manufacturers and global chemical manufacturers seeking to export to India. A chemical management regime that is incompatible with those of India’s trading partners may also limit the availability of critical inputs for India’s domestic value chains. It is also anticipated that the finalization of the proposed rules, and full implementation, of India’s chemical management regime would require extensive time, resources, and capacity.
* It is expected to be published and enforced before 2022
To conclude, it is critical that India considers the possible disincentives that might be created as a result of the above-mentioned measures for foreign companies seeking to trade with, invest in, and manufacture in India. Diplomatic and political engagements with the Indian authorities is also crucial in such proceedings.