By  Ashish Gupta

At Udyog Bhavan in New Delhi, headquarters of the Commerce and Industry Ministry, file-pushing bureaucrats are indulging in a strange activity. They're cementing together bits and pieces of what will eventually be known as Fortress India.

In just over a week from now, the last of the barriers to unrestricted imports will fall. Quantitative restrictions (QRs) on the import of 715 items will be removed. The Indian market could then witness a deluge of foreign goodies, ranging from cold cuts of exotic meats to fancy cars. Oh, and fertilisers, too.

That's great news for the consumers who'll now have the benefit of unlimited choice. But for corporate India, it's bad news. For, there will be no more sheltering from competition and both cost and quality of the product will prove crucial. Those are two areas where Indian companies don't quite match up.

The writing has been on the wall for several years now-since 1997 when India lost the case for continuing with QRs in the World Trade Organisation's (WTO) dispute settlement panel. But instead of gearing up to face competition, India Inc has only lobbied for-and got-protection. As commerce and industry minister Murasoli Maran famously said: ''I will not sit on the ash-hill of domestic industry, wearing the crown of globalisation.'' So on March 31, along with the Export-Import (Exim) policy, the government will unveil a three-pronged strategy to shield India Inc-raise tariff walls, impose non-tariff barriers, and resort to safeguard measures.

• The Finance Bill, which is yet to be passed, may increase customs duties on a range of products, including 39 items reserved for the small scale sector. It's a weapon India has been using to good measure-since March 2000, tariffs of 22 agricultural items have been raised.

There is scope to hike tariffs. Applied customs duty rates are far below the negotiated bound rates in 100 items. And tariffs are yet to be bound in the case of 427 products, which means that the government can impose high customs duties and then strike hard bargains when negotiating bound rates (See The Tariff Wall).

• Amendments to the Foreign Trade Development and Regulation Act, 1992, are being finalised enabling the government to take safeguard measures to check any surge in imports. This could include both QRs as well as tariff barriers.

• WTO-compatible non-tariff barriers are being identified that will increase transaction costs for imports. Food products, for example, will have to measure up to the Prevention of Food Adulteration Rules, registration of drugs will be made cumbersome, artificial colours in liqueurs-commonly used in foreign brands-will not be allowed.

Asserts a senior official: ''The government is determined to ensure that imports don't harm domestic industry.''

Is Protection Needed?

Not really, admits the government official. The ministry monitored the import of items on which QRs were lifted in April 2000 and found there was no surge (See What Flood?). Also, the rate of growth of imports has slowed down, from 36.4 per cent in 1995-96 to 12.1 per cent in 1999-2000 and a measly 8.6 per cent in April-January 2000-01. And non-oil imports actually declined by 8.16 per cent.

In any case, all these measures can only provide temporary respite. India is committed to gradually lowering tariffs, a commitment it seems serious about keeping. Finance Minister Yashwant Sinha clearly put domestic industry on alert when he said in his budget speech tariff levels would be brought down to ASEAN levels in three years.

Besides, tariff walls may not keep out competition. Car dealers, for example, are unperturbed by the stiff 105 per cent customs duty on second hand cars. ''It will still be economically viable to bring in cars in the premium segment,'' insists Riyaz Ahmad, partner in the Bangalore-based National Motors, which deals in second hand cars. A two-year-old Toyota Corsa, he points out, is priced at Rs 1 lakh in the Japanese market. Even with a 182 per cent duty (basic duty along with the special additional duty and countervailing duty), the car will cost only around Rs 3 lakh. Similarly, a three-year-old Mitsubishi Lancer could drive into the Indian market at Rs 5 lakh, half the price of a new made-in-India Lancer. Ahmad is also not worried about the availability of spares. What could, however, queer the pitch for those planning to trade in used cars will be the modifications in specifications (like right hand drive), which the government is firm on imposing.

Even safeguard measures may not be as potent as they appear. Avers Bibek Debroy, Director, Rajiv Gandhi Institute of Contemporary Studies: ''Safeguard provisions are great to have in the statute books but not to put into practice.'' For one, these can be applied only after investigations prove that imports are harming domestic industry. Trading partners have to be compensated with other concessions and the measures come with a sunset clause of four years.

Clearly, industry has to accept the inevitability of competition. Says J.K. Mukhopadhyay, Economic Advisor, Tata Services, and head of the group's WTO cell: ''Policy support can only be cosmetic.'' The response to the coming free trade regime, he insists, has to come from within the corporate sector.

Time to Prepare

Some sectors have got the much-needed respite. Agriculture is one of them, productivity levels of which are half the world average in most cases, thanks to faulty government policy. Initial high tariffs, argues Sharad Joshi, Chairman of the government's WTO task force on agriculture, are needed to help the sector improve its efficiency. Indeed, a 70 per cent duty has, points out R.L. Seshadri, Director of Gurgaon-based United Ricelands, kept out cheap rice from Thailand, China, Vietnam, and Myanmar. Ditto for wheat, international prices for which are $90 a tonne against the domestic price of $145 a tonne. But stiff duties will have to be supplemented by measures to enhance farm productivity, insists S. Sivakumar, Chief Executive of ITC Ltd's international business division. Budget: 2001 has paved the way for removing the various structural impediments to agricultural efficiency and experts would like to see the process continue. Asserts Joshi: ''Along with QRs remove all restrictions on agriculture on April 1 and by next April, you'll see a huge difference.''

Where productivity is not a problem, increasing profitability will be an issue. Coffee producers would like to use the cushion they have got (customs duties have been doubled from 35 per cent to 70 per cent) to increase consumption of coffee. Domestic consumption accounts for only 18 per cent of production and the rest is exported, raising questions about why producers should whine about being hit by cheap imports from Vietnam. Counters Harish Bijoor, Vice-President (Marketing), Tata Coffee: ''The domestic market is stable and gets us 20 per cent better realisations than the export market at any point of time'' The industry has sought the government's help in the generic promotion of coffee to help boost volumes.

The tea industry has other plans up its sleeve. Neither the Indian Tea Association (ITA) nor the Tea Board is losing sleep over imported brands because both Unilever and Tetley have a presence in India through Hindustan Lever and Tata Tea. Neither is likely to cannibalise its own brands. Despite receiving a temporary relief in the form of doubling of import duty to 70 per cent, what worries the industry is imports of bulk teas from Vietnam, Indonesia, and China, which is switching from green teas to black teas. Though large branded segment players like Tata Tea have gardens abroad from where they source their teas, the ITA is worried that others may start importing cheap tea for sale in the domestic market. This will depress demand for Indian tea and push down prices, already low due to a glut. Manufacturers are, therefore, reworking strategies. The Apeejay Surrendra group, for example, plans to build up a presence in branded teas as well as form trading alliances with global tea majors.

The small scale sector could certainly do with this kind of breather. Around 178 items, production of which is reserved for the small scale industry (SSI) will be taken off QRs. Constrained by lack of economies of scale and low investment limits, the sector will be unable to compete with efficiently produced foreign goods. Rues a senior commerce ministry official: ''We should have dereserved the sector five years ago so that they would have been in a better position to compete.''

The toys industry, for example, was dereserved only in Budget: 2001, leaving it no time to gear up for cut-throat competition. The industry has already been laid low by the influx of cheap toys from China. Larger players are managing to survive. Funskool Toys, for example, has covered its flanks with a wide spread of products, with prices ranging from Rs 35 to Rs 1,500. But several smaller companies have shut shop or are switching to low-end products like kitchen sets. Trading is another alternative, says Vivek Jhangiani, Director, United Toys.

Not everyone is throwing in the towel. Around 100 manufacturers have decided to set up a Rs-10 crore Toy City in Greater Noida near Delhi. They will pool their skills and resources and concentrate on specialisation. ''The fragmented nature of the toy industry has prevented it from specialising and sharpen its competitive edge,'' avers Raj Kumar Dhingra, President, Toys Association of India.

The garment industry also has insufficient time to prepare, having been dereserved only in November 2000. The small units form the bulk of the sector, with large players like Madura Garments and Arvind Mills accounting for only 5 per cent of the market. The industry isn't worried about competition from well-known European or American brands that will cater only to a small, niche market. It is imports of cheap garments from low-wage countries like Bangladesh, Nepal, China, Sri Lanka, and Thailand that are expected to kill domestic industry. Garments from Sri Lanka, Bangladesh, and Nepal also enjoy the benefit of lower customs duty because they are part of the South Asian Association for Regional Cooperation (SAARC). A good quality shirt from Bangladesh could sell for Rs 150, against Rs 350 for an Indian shirt. In such a situation, the imposition of a 16 per cent excise duty on branded readymades hasn't helped. Says Rahul Mehta, Managing Director, Creative Outerwear: ''The garment industry has been caught in a cleft stick.''

While the outlook is bleak for the 2.5 lakh small units, the branded players are redesigning their operations. Pantaloon and Bombay Dyeing, for instance, plan to outsource manufacturing of garments to the low-wage countries. Bombay Dyeing is also considering setting up joint-venture textile manufacturing facilities in Asian countries. Realising that the Asian countries can cater only to the mass market, Morarjee Goculdas Spinning and Weaving Company is planning to focus on the high-end products. It also wants to beef up its exports from the current 15 per cent of turnover to 50 per cent by 2005.

Not everyone seems to be gearing up to fight. The liquor industry has managed to shelter itself behind a staggering 224 per cent customs duty. That should keep out low-end liquors from Europe, Australia, South America, and South Africa. Liquor manufacturers don't see this as protection, but more the provision of a level playing field. Indian firms, points out Kalyan Ganguly, Managing Director, United Breweries, lack economies of scale, in sharp contrast to international players. What's more, western countries heavily subsidise agriculture that brings down the cost of production of most spirits. In a smart move, some manufacturers are tying up marketing and distribution ventures for products which are not in their portfolio. Radico Khaitan, which manufactures 'Eight PM' whisky and Contessa rum, will distribute wines brewed by American wine major Ernest & Julio Gallo. And Baccardi India has tied up a marketing venture with international whisky manufacturers William Grant & Sons.

Some industries, however, will have to reconcile themselves to tough times. The tobacco industry, for example, where capacity utilisation is down to 50 per cent and bottomlines are squeezed thanks to falling consumption and a steep excise duty ranging from Rs 570 to Rs 1,780 per thousand sticks. The industry is as much worried about the import of premium brands like Marlboro, Camels, and 555 as with cheap Chinese brands like Peacock and Horse, whose packets look exactly like Benson & Hedges and 555. The industry has been clamouring for customs duty to be increased from the current 35 per cent to the bound level of 150 per cent but in vain. ''We don't think a 35 per cent duty is enough,'' says R.A. Poddar, Chief Executive of Godfrey Phillips India. The industry has won a limited victory, though. Lobbying has helped in getting a ban on advertising tobacco products, depriving foreign brands of marketing muscle. That, says Poddar, won't help a great deal since the advertisements can be carried on foreign channels beaming into India.

Clearly, some see the liberalised trade regime as a threat while others see immense opportunity. How India Inc responds to a QR-free world will separate the men from the boys. 

-With reports from E. Kumar Sharma in Hyderabad, 
R. Chandrasekhar in Mumbai, Rakhi Mazumdar in Kolkata, & Ranju Sarkar in New Delhi

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