Import Restrictions Hit Indian Traders Hard

Business Capstone

Bengaluru: To cope up with Atmanirbhar Bharat Abhiyaan, local retailers face difficulty in conducting business operations. 

With a calculator in one hand and other involved in writing financial reports, Nikhil Prasad, a tyre manufacturer at Velox Tyres Pvt. Ltd. said, “The import restrictions imposed by the government are neither giving us the advantage of increased demands, nor they are letting us make any profits.” 

The government claims that the Atmanirbhar Bharat scheme is introduced to make India self-reliant. The scheme is introduced to help the traders recover from the loss incurred due to the Covid-19 pandemic. However, traders feel that the worst part of the scheme is that it was introduced during the pandemic. 

“The scheme might aim to benefit the people and make India self-reliant. However, the worst thing is that due to pandemic and economic slowdown, the market is yet to pick up,” Prasad added. 

Further, he said, “As all the tyre manufacturers have turned to local suppliers, there is a steady rise in demand for rubber. Amidst high demand, the suppliers are unable to fulfill the rubber needs of manufacturers. As a result, the price of rubber is soaring continuously. It has increased by around 45 percent. We doubt whether the situation is created to take an advantage of traders miserable times or to balance the demand-supply by applying the demand law.”

According to media reports, Automotive Tyre Manufacturers Association (ATMA), domestic production of rubber can meet just 60 percent of the demands. The rest of the rubber requirements are fulfilled by imports from countries such as Japan, Taiwan, Thailand, etc. Therefore, it is essential to import to meet demand and supply. The natural rubber imports reduced by 20 percent, whereas domestic production increased by nine percent only. Due to import restrictions, ATMA said that domestic prices of rubber increased by 25 percent as compared to international market prices.  

The government imposed strict import restrictions all of a sudden when the market was yet to recover from the economic slowdown caused by the pandemic. The new norms have affected the rubber industry due to unclear guidelines, increased container freight rates, and uncertain demand. 

Chetan Kumar, a rubber manufacturer, S.V rubber industries who sell rubber to local companies said, “Restricted imports have hit the business hard leading to continuous losses. The company didn’t face any difficulties in running the business during the lockdown. However, from November 2020, due to restricted imports by the government, the firm is unable to meet the demands. Meanwhile, all the local manufacturers have turned to buy from local suppliers which have resulted in an extreme rise in the demand for rubber.” 

The rubber prices have gone up, but rubber manufacturers are also not exempted from the high import duties and container charges. Raw material such as methanoic acid used in producing rubber is majorly imported from China. According to trends economy data, China constitutes 55 percent of the world’s exports of this acid. Out of this, methanoic acid of $6.71 million (4.13 percent) was exported to India.  

“The price of raw materials and duty charges have gone up by 50 percent. Due to increased prices and delays in the supply of raw materials, the demand remains unfulfilled. Also, the payment of goods sold is received by the seller after more than 90 days. This causes a lack of liquidity and hence, creating issues in the production chain,” Kumar added.

An unexpected rise in import restrictions without any clear notice or guidelines made the trader’s situation worse. They weren’t prepared for this. Some of them faced excessive stock, some traders were short on raw materials, while some were unable to manage amidst the unclear import restrictions.

With the curbs imposed, the restrictions on the import of tyres used in bicycles, and rise in import duty, container freight rates, etc. on more than 50 items, retailers are unable to import from China. Tyre manufacturing companies have skipped the rubber imports from China to fulfill their requirements due to policy changes. Therefore, due to restrictions imposed, they end up importing from Taiwan, Japan, etc. which is costing them more.

 The tyre was placed under the restricted category. An importer must consist of license from Directorate General of Foreign Trade.

Regarding the price rise of raw materials, Prasad said, “Due to ban in tyre imports from China, the price of raw materials suddenly increased. In the absence of competition from products manufactured in China, the rubber traders increased the price steadily realizing rising demand. As a result, we faced a tough situation. Even with the rise in demand for tyres by 10 percent to 15 percent, we are unable to afford the raw material prices. As a result, we produced fewer tyres due to increased cost of production and high prices.”

Amidst the increased price of rubber, the rubber manufacturers claim that they are trying to balance the demand and supply forces. 

“We are simply applying the law of demand to manage the gap between demand and supply. The price of rubber is set high so that at higher prices, traders will demand less of the materials,” said Kumar.

The government’s decision to reduce imports from China in addition to the pandemic has created issues in the trading community. Apart from manufacturers and wholesalers, retailers are facing the threat too. 

Rahul Kishore, a retailer at JK Tyres, said, “Sudden changes in import policies have been proved as a threat to my business. Every year we import around 60,000 tyres from China. However, now due to restricted imports, I have to buy them from local manufacturers. The only thing I am left with is losses. Tyres purchased from local manufacturers costs us double as compared to imported tyres.”

According to the report, in June 2020, the government imposed curbs on the import of tyres used in motor cars, busses, motorcycles, etc to promote the domestic tyre industry. The tyre was placed under the restricted category. Hence, to import, an importer must consist of an import license from the Directorate General of Foreign Trade. 

In a media report, Rajiv Budhraja, Director General at ATMA said that besides other restrictive measures, imports of natural rubber attract 25 percent import duty which is one among the highest in the world. Whereas, tyres can be imported at 10-15 percent duty. Hence, traders preferred to import tyres in a majority of the cases. 

Ramesh Shah, a retailer at S & S Trading, who used to import one-third of his car tyres requirements from China explains the situation. He said, “the policy measures do not seem to achieve the objective, however, they have proved to be stumbling blocks in the tyre industry. The demand has increased, however; we can’t afford to buy sufficient tyres at the high cost charged by local manufacturers.” 

According to the media report, ‘Vocal for local’ exists since the swadeshi movement in 1906 which helped develop Indian nationalism during that period. But, from 1990 onwards, due to liberalization and globalization, it is difficult to survive in the market without access to global resources. 

Kumar said, “we can’t fulfill the demand of rubber all of a sudden. We were dependent on imports from China for the last 14 years. The production lines can’t be changed within a month or so as it is challenging to train the employees, cope up with the market forces and provide the qualitative material.”

The India-China border standoff at LAC evolved over eight months. The relations between India and China worsened impacting the Indian economy to the worst. 

After that, the local manufacturers realized that situation will not be normal again, and hence, they began purchasing from the local market. Excessive demand and a limited number of suppliers created the situation of insufficient supplies. Further, the monopoly over price is also created.

“As the tyre manufacturers rely on local suppliers, the major impacts in the tyre industry include delay in supply of raw materials, increase in the price of rubber and other materials by 30 percent to 50 percent, and hence, affecting the production line and facing an inability to meet the demands,” said Prasad. 

Raju Sarvaiya, a retailer at Narsinh Tyres said, “Sudden restrictions imposed by the government didn’t even give the chance to recover losses incurred due to pandemic. We were neither able to fulfill the rising demands nor we could retain the earnings as compared to that of pre-Covid times. Earlier also I used to buy from local manufacturers, however, the cost was very low. It was almost half as compared to now.”

After several years, local manufacturers experienced production at 100 percent capacity. However, the maintenance of production lines proved to be a challenging task.

Prasad further grieves over the maintenance of the production line.

“In the beginning, during July-August, we didn’t receive any orders even after import restrictions. With the already manufactured tyres, we struggled to empty the warehouses. We have the limited space of 10,000 sq. ft., if we are left with excessive stock and no supply, the only choice we have is to halt the production line,” he added. 

“Carbon black material is the major chemical in tyre manufacturing. That was imported from China earlier. Due to no imports, we faced issues in the production and stopped the production line for several days,” he added.

Kumar further informed that this scheme has led to change in the production lines as several traders stopped importing and started a production line in India, however, the cost of production increased by 10-15 percent leading to losses. 

According to the data provided by Kassia, only 60-70 percent of production has been restored as compared to pre-Covid times. Around 3 lakh people lost their jobs and about 15 percent of industries have been permanently shut resulting in a minimum 30 percent loss. In the absence of financial aid to the traders, they are left with no option except to close the organization’s shutters.  

Under Atmanirbhar Bharat Scheme, the government outlined five pillars – Economy, Infrastructure, System, Vibrant Demography, and Demand. Also, the new norms state that a firm can import tyres only if the vehicle has been manufactured for export purposes. 

Due to the India-China standoff, the government had imposed a lot of trade restrictions. Moreover, on May 12, PM Modi announced an economic package of Rs 20 lakh crore to make India self-reliant. It is to provide aid to the poor, laborers, MSMEs, and migrants who have been widely affected by COVID. 

Also, when Nirmala Sitharaman announced the third stimulus package, it allocated financial benefits to all the sectors such as agricultural, MSME, etc. However, traders were left out with no financial aid. 

Naturally, the traders are highly disappointed by the stimulus package as it does not include any benefits to be offered to traders. Traders are not allotted any financial aid by the government to boost their business operations. Instead, import restrictions affect the traders and limit their operations due to reduced supply and lack of raw materials. 

The government’s initiation to reduce dependence on imports has resulted in a decline in imports. In parliament, Piyush Goyal stated: “India’s imports from China have declined by 27.6 percent during April-August, 2020-21 over the corresponding period of the previous year.” 

According to the report, the exports of rubber in India decreased to 499.41 USD in 2020 from 2098.08 USD Million in 2019. Also, according to the report, rubber imports from China decreased by 25 percent. Also, according to the report by Local Circles, after the introduction of the Atmanirbhar Bharat Scheme, 38 percent of firms face a lack of funds, four percent have shut down and at least 57 percent have not been benefitted. 

Atmanirbhar Bharat Scheme aims at an economy that brings quantum jump, instead of an incremental jump. But, amidst economic slowdown, it is difficult for an economy to experience a quantum jump with decreased exports and restricted imports.  

Apart from import restrictions, the traders have faced issues in export too. Amidst restricted imports and export issues, it is difficult for an economy to flourish amidst unmet demand and supply forces. The unexpected consequences are continuously piling up with no preventive measures available. For an instance, the curbs imposed to restrict ship movements impacted the tyre exports. 

Prasad explained the issues faced by him saying that the export consignment goes to Nigeria, Singapore, and Dubai. “Income has not been hit by imports only, but exports contribute too. The container shortage at ports is leading to delays in transshipment. Delay in transshipment further affects the bills receivables as well as delay in delivery of the goods. People at ports are not able to line up the containers due to excessive check-ins and vague instructions,” he said.

He further added that earlier, the tyres were exported within 45 days, but now it takes around 75 days. Delay in exports is followed by delay in payments. The amounts earlier were received within 30 days, which has now been delayed to around 60-75 days.

The exporters don’t have an option as road transportation proves to be around eight percent costlier. 

The production capacity of industries was also affected due to the migration of laborers amidst the pandemic. According to the report, industries are unable to normalize earnings due to labor disruption caused by the departure of migrants. 15-20 percent of workers either permanently traveled back to their home towns or are yet to return affecting the production efficiency in the labor-intensive industries. 

Prasad said that they hadn’t yet made any changes in the production line. “The demand was uncertain that at a certain period we had to stop the production, while at some time we experienced the need to increase our production. But, now the situation seems to be stable, hence, we are planning to expand the production line,” he said. 

Moreover, he added that we didn’t fire any of the employees, neither they left during the pandemic. However, due to unstable production, the employees migrated back to their homes in Bihar and Uttar Pradesh. Employment of new employees affected the productivity level by 10-20 percent. 

Prasad said that restricting imports all of a sudden may result in adverse effects to the industries. Even after a year, the situation has become worst rather than being stabilized. There is enough evidence that a complete ban on imports will lead to more crises resulting in reduced incomes.

“For instance, the measures to ban tyre imports were intended to raise the domestic production of natural rubber. However, in reality, the restrictions proved to be stumbling blocks and didn’t benefit at all,” he added. 

The ripple effect on other industries:

Prasad is hardly alone in expressing the distress caused by import restrictions. The import restrictions have resulted to trade barriers for several businesses. Other traders dealing in the manufacturing industry of electronic items, tyres, sports goods, consumer durables, etc. face the same problem. India’s import requirements are quite diverse. It depends on imports from China for electronic appliances, sports goods, tyres, etc. According to the media report, in 2020, India’s imports accounted for $58.71 billion from China.  

Reaheman, owner, AR Gym Equipment manufacturing company said, “Continuous increase in the price of steel has led to an unexpected loss to our firm.” He further added that the steel prices have gone up by Rs 30 per kg, and we can’t afford to buy the raw material amidst uncertain demand. At the initial stage, we reduced the production line and unemployed a few laborers. Later, with the increase in troubles, we faced the issues of delay in payments by around five months.

“In the absence of working capital, we are forced to stop the production line and almost on an edge to liquidate the business. Traders don’t even have the benefit of increasing the price of goods produced. A price increase might cost us to lose our consumers and may hit hard to our earnings,” he further added.

Import delays have affected the pharmaceutical companies too. India’s pharmaceutical sector depends on raw materials such as Active Pharmaceutical Ingredients (APIs) produced in China. According to the media report, India relies on China for around 40-80 percent of its API requirements. 

Hanumanthaiah M P, assistant manager at Bentley and Remington Private Limited, a pharmaceutical company, said, “we are facing a lot of shortage of raw material. Earlier we used to get the raw materials instant upon the order. However, now, due to increased formalities, it takes around one/two months to get the raw materials. Delay in raw material has affected the manufacturing process. It has slowed down the production process and due to this, the labor has left. The labor issues have affected the quality of production by a reduction of 25 percent.”

He further added that already, there was a problem in selling the medicines other than that used for Covid-19 infection. Only Covid-19 medicines are in demand. Earlier, 35 lakhs of tubes (tube refers to containers consisting of 60-75 packets) were produced and sold, but now it has been reduced to 25 lakhs. Now, the raw material insufficiency proves to be an additional burden. 

Before the imposition of import restrictions, 50 lakh units per month were ordered and manufactured, which has now declined to 25-30 lakh doses due to insufficient raw materials. 

“Producing less than the capability increases the cost of production adding to company’s losses. Apart from this, due to long procedures and several transaction issues, the delay in payments is experienced. Earlier, the payment used to receive within two/three days, which gets delayed by two to three months,” Hanumanthaiah added. 

Under the Atmanirbhar Bharat scheme, the government announced a package of Rs 20 lakh crores to reduce imports and make Indian firms competitive in the global market. However, the scheme offers benefits to few MSMEs. The package does not allot any financial support to the traders. 

This makes them reluctant over making any changes in the price of their goods.

H C Santosh, assistant manager, the HR department at The Mysore Electrical Industries Limited that manufactures electrical appliances explains the tough situation faced by the company. He said that the prices of the raw materials change every month. However, the company has to fix the price of finished goods and can change only once a year. For an instance, the price of copper changes every month however, we can’t change the price of coils, switches, and conductors.

The ban on import goods has however positively impacted the company. “The demand has increased from 70 crores orders per month to 85 crores,” he added.

Vishal Dangar, an economist said, “This is not the right time to introduce such restrictions. We will require a set of new policies for this. This might prove as a costlier decision for the Indian economy as it has already been hit hard by the pandemic.” 

He further added, “Imposing tariffs and trade duties seems to be an inappropriate decision. Government shall be ready with an alternate option to recover after taking this decision. India won’t be able to survive without imports as the import list from China is quite diverse. It includes electronic goods, pharmaceutical ingredients, tyres, toys, sports goods, jewellery, etc. India isn’t potent to manufacture all these items within the domestic boundaries. If the government continues to impose such restrictions it might affect the growth rate. The industrial sector needs a lot of financial aid and hence, the government shall proceed towards this.”

As a part of the solution, he informed, “That government shall introduce required policies so that the demand rises and consumption of goods can be increased, lower the bank rates and invest more on infrastructural development.” 

Therefore, a blanket ban on imports may not prove to be beneficial, instead, it may affect the business operations widely. Government shall impose the rules that prove to be beneficial for the industries as well as for the economy. 

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