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Photo: Mint
Photo: Mint

Opinion | We need policy clarity on import substitution

Any plan to nurture a domestic industry that makes lithium batteries behind tariff barriers mustn’t end up fostering inefficiency in India. A well designed policy could help prevent this

India is reported to be considering a new tariff regime for the import of lithium-ion cells, together with a raft of local incentives, to boost domestic production. Since China is a major supplier of these, the broad objective is self-evident: to curtail and then eliminate dependence on a country that has shown itself hostile to India. Lithium cells are the basic building units of rechargeable batteries that power everything from portable devices such as laptops and smartphones to larger energy hogs, such as electric vehicles. These cells have military and aerospace applications as well. The government is said to be mulling a 10-year import duty plan that will let local manufacturers find customers even if they make these products at higher cost. To encourage an industry at home, the Centre may also offer companies tax-offs and concessional finance. This would be a policy of import substitution, nearly three decades after the country began to rid itself of such schemes. While a revival of the concept gels with Prime Minister Narendra Modi’s call for a self-reliant India, and we should not let China corner local markets, we should still exercise caution before embarking on an experiment that has had a poor record of success in the pre-liberalization era.

The overall experience so far has been that industries shielded from global competition by high tariff walls—or even non-tariff barriers—have little incentive to keep costs down and quality high, as companies based in India have a large captive market within the country. Over time, even if there exists domestic rivalry, this arrangement tends to spell inefficiency that pushes up costs for all users of the protected product. Lithium batteries are so important to digital and internet enablement today, that a rise in their cost will have an instant impact on sunrise sectors of our economy. It could also delay India’s bid to switch to electric mobility, since the battery costs of e-vehicles must fall sharply for them to match the price-value deal of petrol and diesel options. Of course, the government would expect Indian battery makers to crush costs as they go along. In the business of stored-power units, though, China is seen to have a natural advantage as well, thanks to its abundance of input minerals—including rare earths—for their production. To keep India well supplied with raw materials, three state-run metals companies formed a joint venture last year called Khanij Bidesh India Ltd, which aims to acquire reserves of strategic minerals such as cobalt and lithium in countries such as Argentina, Bolivia, Chile, South Africa and Australia. How quickly these efforts begin to bear results could determine the pace at which our local players can replace Chinese imports without hurting consumers.

How our plan to edge out imported lithium cells ultimately works out, however, might depend on the details of our substitution scheme. To prevent domestic cost bloat, it would make sense to build a gradual reduction of duties into the decade-long programme. That would give domestic players enough time to get their act together while raising their exposure to import competition. In addition, export targets could be set as a test of how globally competitive their products are. If they fail to sell their products in world markets in about three or four years, the entire plan should be scrapped. The push for self-reliance must not turn India into a high-cost market, least of all in areas vital to the future of value creation.

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