There's a cost to free trade, and several of India Inc.'s worthies are just discovering this. Just ask companies in the business of producing wheels, tyres, silk, chemicals and various other products. Chinese manufacturers dominate these categories, and several others in the manufacturing domain and what this global powerhouse sees as low-cost exports, companies in India see as dumping.

Dumping itself is on the decline globally and in India. Yet, in an era likely to be marked by China's complete dominance of the manufacturing sector, anti-dumping (AD) measures, largely in the form of duties, will emerge as critical protectionist tools. The Chinese economy depends on manufacturing: 54 per cent of its gross domestic product comes from this. Over the past 15 years, the country has build up huge capacities across a variety of sectors. The ensuing economies of scale combined with low wage, power, and capital costs translate into a sustainable competitive advantage in the export market.

Not everyone is convinced. "Economies of scale can only help with variable costs," says Sunam Sarkar, Chief, Corporate Strategy and Marketing, Apollo Tyres Ltd. "Power, labour and finance could all perhaps be available more cheaply, but the price of rubber, steel and oil is the same for China as it is for India." Other executives (in other industries) in India and elsewhere are doing similar calculations. The result: Chinese imports are no longer as welcome as they once were. According to the World Trade Organization, China was the most popular target for new anti-dumping complaints in the second half of 2005, with the number increasing nearly 40 per cent over the corresponding period of 2004. "It is all part of the game called free trade," says T. K. Bhaumik, Chief Economist, Reliance Industries Ltd. "The world has still not learnt to cope with China." Nor, it would appear, has India.

"The new cases are largely restricted to China," says C. L. Fernandes, Director General, Anti-dumping, the man responsible for dealing with dumping and anti-dumping duties at the Commerce Ministry. In the case of silk fabric and tyres, for instance, Indian companies complained because import prices of products from China are almost half that of comparable local products. The Commerce Ministry has levied provisional duties and launched a full-fledged investigation, after which a final decision on an ad duty will be taken.

Investigating complaints of dumping is not easy; the seemingly-opaque costing techniques followed by Chinese companies make the process difficult and time-consuming. In the case of tyres, Indian companies allege that Chinese tyres are sold at prices that do not cover raw material costs. That accusation fits in well with a conspiracy theory that has done the rounds for several years: China's strategy is to sell at prices lower than the cost of production, wipe the competition off the face of the earth, and then raise prices to more reasonable levels. Still, several of the complaints have more to do with inherent inefficiencies in the domestic environment than predatory pricing by Chinese companies.

Silk is a case in point. "There is absolutely no comparison between the Indian and the Chinese silk industries," says K.S. Menon, Joint Director, Central Silk Board. "They (Chinese companies) have huge capacities with a great deal of automation, while silk in India is still a tiny sector industry." In such cases, any protectionist measure, such as ad duties will at best provide a temporary reprieve. "We can't protect them in the long term," says Biswajit Dhar, Head, Centre for WTO Studies. RIL's Bhaumik suggests industry-specific responses to cope with the onslaught. And in cases where industries are particularly vulnerable, he recommends pre-emptive measures like safeguard duties. "One need not wait for injury to occur," he says. There is a case for a better thought out trade-defence strategy, just as there is one for having one ministry handle both ad and safeguard duties (currently, the first is with Commerce and the second with Finance). In the long-run, though, building competitiveness may be the only way out. "India will have to look at itself very closely," says Dhar. "We are thoroughly uncompetitive in many sectors."

-Shalini S. Dagar

INSTAN TIP
The fortnight's burning question.

Is the time right to start the process of setting the rupee fully afloat?

Yes. Siddhartha Roy, Economist, Tata Group

The three-phase plan suggested by the Tarapore Committee is a prudent step. It combines the cravings of an economy for higher growth with unspelt apprehensions about micro-level investment behaviour. The process should start right away. There is no point in delaying it further.

Yes. B. Sambamurthy, Chairman, Corporation Bank

It is only a matter of time (before this happens). Domestic savings may no longer be sufficient to fund the aggressive growth plans (of companies and the government) in the infrastructure sector and other sectors. The buoyancy in outbound M&As is yet another trigger for faster shift to full convertibility.

Yes. R. Mokashi, Executive Director, Care Ltd

The move towards rupee convertibility (as envisaged in the Tarapore Committee's report) is inevitable. The integration of the Indian economy with the global one has set the stage for the process of setting the rupee fully afloat.

-Compiled by Anand Adhikari

EXPERTAKE
Bimal Jalan On CAC

Rajya Sabha member Bimal Jalan was Governor of the Reserve Bank of India when the Asian crisis broke in the 1990s and India quietly shelved its plans for capital account convertibility (CAC). He spoke to BT's Shalini S. Dagar on the subject.

Given the second report on CAC what are your views on full CAC for India?

There is no doubt in my mind that for all productive useful purposes there should be free capital account convertibility. It is important that we do not politicise the issue.

So what are the glitches you see in the move to full CAC?

We should remember that the Indian rupee is not a reserve currency. At the end of the day, foreign central banks hold dollars or euros as reserves. So, yes, we are ready for full CAC for productive purposes but not for speculative flows.

The current committee has recommended a tight band for the rupee...

I am not in favour of a fixed exchange rate or movement within a tight band. This will reduce flexibility to handle unexpected events. Also, major international currencies in relation to which rupee values are quoted, do not move within a band.

The Tarapore Committee report had recommended certain benchmarks of fiscal prudence in its earlier report. This time around it stresses banking sector reform.

All these things should be done. CAC is really a secondary issue.

The Cost of Friendship
Now that they are friends, India has to learn to live with the US.

The long arm of friendship: For good and bad

A historic nuclear deal may have brought India and the US closer than they ever were before, but the former is discovering that being friends with the latter is something that takes a dash of tolerance, an ounce of patience, and a whole heap of understanding. India, it would appear, missed the point entirely in the euphoria following President George W. Bush's visit to India where he promised to help India's nuclear-energy initiative, declared the country a strategic ally of his own, and sought that more mangoes be exported from India to the us after tasting the fruit at a state luncheon.

The US firmly believes that what is good for it, is good for the whole world and works assiduously to achieve the first (sometimes under the guise of working for the other). Free trade, for instance, would, in the American scheme of things, be global trade that protects the interests of America, Americans, and American companies.

In keeping with this philosophy, the US has written to the Indian government, objecting to its proposal seeking to ban private sector couriers from carrying parcels weighing less than 300 grams within the country.

The logic behind the move by the Indian government is to ensure that India Post earns enough to continue to deliver mail at reasonable rates between two remote locations, not very different from the 'mail monopoly' of us Post in certain categories of mail and packages, which has been criticised by several people, including economist Milton Friedman. The US has indicated that India's move could have a bearing on the ongoing services talks at the World Trade Organization.

The package issue apart, the US has also come to the aid of beverages companies Coca-Cola and PepsiCo, in the wake of the ongoing pesticides-in-colas controversy. The country's Under-secretary for International Trade Frank Lavin has warned India that bans imposed on the products of the two companies by several state governments could blight India's chances of attracting American investment. And more recently, us Ambassador to India, David C. Mulford, commented that India's economic reforms process seemed to be slowing down, not really the kind of thing expected of the representative of a friendly country.

Anjan Roy, an advisor to the Federation of Indian Chambers of Commerce and Industry, believes that the US government's actions, prompted by a desire to look after its own (like American courier firm FedEx) are "nothing exceptional". "We should act fairly keeping in mind what is best for us," adds Roy.

That is what the US does, and it would surely understand why its friends are following suit.

-Amit Mukherjee

IS INDIA REALLY AT #134?

The world bank's recent report on doing business in India, ranks the country at 134 in terms of the ease of doing business; Maldives is #53, Pakistan, #74, Bangladesh, #88, Sri Lanka, #89, China #93 and Nepal, 100. The Indian government has rubbished the report, but Melissa Johns, one of its authors, believes "the findings will help Indian policy makers frame government policy and reforms better". The ironic thing is that despite India's continued poor performance in reports such as these, the country remains a magnet for foreign companies and investors. Salt, anyone?

-Aman Malik