Imports of electrical equipment assumed threatening proportions
Is ‘Made in China’ the most threatening phrase for the Indian electrical equipment industry?
Based on the projections of the government for capacity enhancement in power generation, transmission and distribution in the 10th, 11th and 12th Plans, the domestic electrical equipment manufacturing industry has made huge investments in doubling and, in some cases, even tripling its production capacity.
However, this built-up capacity currently stands underused across several products due to sluggish domestic demand on account of the slowdown in the power sector and a surge in imports of electrical equipment in recent years. This is significantly impacting the commercial viability of the domestic electrical equipment industry and impacting both the top line and bottom line of the manufacturers. This can have severe long-term consequences.
In the last couple of years, there has been hardly any growth in capital expenditure in the T&D equipment sector. T&D equipment manufacturers are working at only 70 per cent of their production capacity.
In the last few years, the domestic manufacturing capacity of generation equipment has being ramped up and currently stands at 25,000 MW per annum against a requirement of about 16,000-17,000 per annum. With six-seven joint ventures coming up in India, the capacity will increase to 40,000 MW per annum by 2014-15. The additional power generation capacity target for the 12th Plan has also been scaled down to about 88,537 MW. As a result, even the generation equipment sector will soon be sitting on huge surplus capacity.
India’s inability to meet targets for generation capacity addition is adversely impacting the downstream transmission and distribution sectors.
Absence of a level-playing fieldAbsence of a level-playing field for the domestic industry to compete with imported electrical equipment — especially from China — is a clear, present threat.
During the last 5 years, India’s imports of electrical equipment imports have increased at a CAGR of 30.30 per cent and were at $15.7 billion in 2011-12. Import duties on most products are quite low and are being further lowered under the various free trade agreements (FTAs) signed by India.China’s share in Indian imports of electrical equipment has dramatically increased in the last few years, and now it stands at 44.5 per cent (2011-12) of the total from 15.3 per cent in 2005-06. Imports from China have grown at a CAGR of 57.5 per cent in the last 6 years and were Rs.33,432 crore in 2011-12.
Imports of electrical equipment in the country have assumed very threatening proportions and now captured 43 per cent of the market for electrical equipment in India (Rs.173,092 crore in 2011-12), whereas there is significant underused of installed domestic capacity.
Domestic electrical equipment manufacturing industry suffers a cost disadvantage of about 14 per cent vis-à-vis imports due to sales tax and VAT, entry tax and octroi, higher financing cost, lack of quality infrastructure, dependence on foreign sources for critical raw materials and components etc.
In addition, Chinese manufacturers of electrical equipment are given by their government export subsidies as high as 17 per cent of the export value, social security subsidies, lower income tax rate (15 per cent) and access to financing at low rates of interest, which give Chinese companies over 24 per cent unfair pricing advantage and allow them to price their products very competitively. Further, China is also offering credit to foreign buyers on very soft terms to finance their imports. As a result, imports from China are escalating every year. All these make Indian industry non-competitive in its own country.
Disproportionate reliance on imported power equipment, with uncertain quality and lifecycle, and with no domestic manufacturing facility to provide immediate spares, replacements, etc. especially for heavy equipment, is fraught with long-term risks. The government needs to provide greater encouragement to indigenous manufacturing as done by several countries, including China.
What needs to be done?To stimulate demand for the domestic electrical equipment industry, the government should expeditiously address the challenges confronting the country’s power sector, including the problems in fuel linkages, land acquisition, environmental and other clearances, precarious financial health of utilities, etc.
In recent months in the telecom and electronics sectors, there has been a move by the concerned government departments to initiate preferential market access to domestically manufactured products on security grounds and in government procurement. The power sector is of at least as much strategic importance as these sectors, if not more.
Non-reciprocatory market access in ChinaFor any tenders by the Chinese national power companies such as State Grid of China, Southern Power Grid of China as well as the Chinese Provincial Utilities, Indian companies can’t participate directly and one needs a local presence. No such conditions exist in India.
The government needs to encourage indigenous manufacturing and technology in the domestic electrical equipment industry, as done by several countries, including China by:•Framing model procurement guidelines for utilities•Ushering in standardisation of product specifications and design parameters•Limiting participation in tenders for bidding for domestically funded projects to domestic manufacturers only•Putting in place a requirement of setting up a manufacturing facility in India, within a specified timeframe of the award of the tender, where foreign bidding is allowed, to provide for level-playing field bidding, that is, phased manufacturing process (PMP) should be made mandatory in the country for supply of major equipment•Stipulating a minimum percentage of the total procurement by any utility to be of ‘Made in India’ products•Stipulating some amount of price preference for Indian products in procurement by utilities•Supporting commercialisation of innovations•Facilitating access of Indian manufacturers to foreign technologies and know-how•Providing fiscal incentives and subsidies for developing indigenous technologies and innovative productsEncouraging exports•Protecting the domestic industry’s interests under different FTAs.
These measures will support Indian manufacturers and provide necessary safeguards to the domestic industry that is facing non-market competition on cutthroat below-cost entry level prices offered by Chinese manufacturers.
The levy of duty by the government last year on generation equipment for mega power projects (MPPs) /UMPPs (1,000 MW and above) (BCD of 5 per cent, CVD of 12 per cent and SAD of 4 per cent), is welcome, but it gives an effective protection of only 4.7 per cent to domestic manufacturers.
Although, import duty exists on T&D equipment (generally 7.5 per cent BCD) and generation equipment for non-mega projects (generally 5 per cent BCD, including project imports), there is need to hike it further. BCD should be increased to a uniform 10 per cent on all electrical equipment. Import duty reduction should not be even considered in light of the capacity underused in the domestic industry and the huge imports already taking place.(Courtesy: IEEMA)
Imports of electrical equipment assumed threatening proportions