Date : 13.12.2003

Hon'ble Shri Jaswant Singh ji,

We are thankful for your DO letter 10(10)/Ec.Dn./2003 Dt. 2nd Dec 2003 inviting suggestions for Union Budget 2004-05 from FISME.

You are already appreciative of diversity and heterogeneity of the Small Sector and, therefore, of their sometimes conflicting demands, though not necessarily conflicting in their universal needs. Ten years ago, if the demands of SSI sectors converged on one issue 'concessions', today their demands as well as their needs highlight their yearning for 'level playing field' : be that interest rates, cost of power or parity in duty structure. My colleagues in other SSI associations would be articulating the rest of the issues, FISME intends to flag only one issue which could 'make or break' the SSI sector in spite of your other initiatives seemingly equally pressing.

Today, more than any time in our economic history, Small Industries need : Single rate of import duty not greater than 8% on all tariff lines to survive, compete and grow. (The rationale is appended as annexure.)

Incremental change in tariff structure would not do. The changed economic realities mandates a turnaround in the multi-tier tariff structure. We are aware of Machiavelli's sobering reminder: "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things", but at the same time we feel if a leader of the stature like you would not dare conduct it, who will?

With kind regards

(Dinesh Singhal)
President

To
Shri Jaswant Singh
Hon'ble Union Finance Minister
North Block
New Delhi

Encl Annexure : Rationale for proposing Single Rate of Customs Duty (5 ~ 8%) on all tariff lines

Annexure

FISME's budget proposal
Single Rate of Customs Duty (5 ~ 8%) on all tariff lines

1. Historically in India, the multi-tier import tariff structure served as a fertile ground for different lobbying groups for seeking higher duties on their final product and lower duties on their raw materials and inter mediate goods. As in an increasingly industrialized economy it is difficult to settle what constitutes 'raw material' and what 'finished product', duty structure was settled on the basis of lobbying capacity through more or less ad-hoc measures. The multi-tariff structure also was abused routinely by customs officials at the borders as their discretion could save importers a lot of money. Over a period of time, the Indian tariff accumulated substantial anomalies due to this. Higher duties provided the cushion to these raw material manufacturers to raise their domestic prices who formed cartels and impacted SSI competitiveness.

2. Till there were quantitative restrictions (QRs) in place, its
impact was limited and manifested in making the economy high cost only. However, after removal of protection and opening of economy it was required that tariff be made graded to avoid reverse tariff escalation. The status quo had had adverse impact on SSIs and their effective rate of protection declined consistently due to their raw material attracting higher rate of duties than their finished products. It impacted the profitability of a large number of SSIs dominated sectors because now their produce could be imported freely at lesser duty. Basic raw materials such as Iron and Steel, Copper, Aluminum and Plastics Raw materials, all remain at highest slabs.

3 Free Trade Agreements (FTAs) that India is entering into further necessitates that duties are lowered and unified to minimize the reverse tariff escalation cases as large number of items would be entering India at '0' level of duty.

4. The number of SSIs engaged in export is meagre (less than 0.7%) chiefly because of their inability to take advantage of duty exemption/remission schemes (DEPB, Advance licence etc) due to high transaction costs. Imports also is not a viable option for them due to their low volume. The single and low rate of duty regime would make markets efficient and reduce the cost of prices of raw materials making them more competitive at home and abroad.

[Kindly see more details on FISME at : http://www.fisme.org.in

…the Indian tariff accumulated sub -stantial anomalies

Removal of QRs mandated to reform the tariff on graded lines to avoid 'reverse tariff escalation' …

…impacted the profitability of SSIs ..their product could be imported freely at lesser duty…but steel, copper, aluminum, plastics raw material remained at highest slabs

FTAs further necessitates low and single duty

..single and low rate of duty regime would make markets efficient and reduce the cost of prices of raw materials making SSIs more competitive at home and abroad.