The Dumping Ground

Indian manufacturers have in the recent times been plagued by dumping. A look at the causes, effect and remedies of dumping.

Dumping : The selling of goods overseas below cost to get rid of a surplus or to gain a competitive edge on foreign firms.

In India the latter has been the primary reason for dumping, a rampant phenomenon in the last five years. One of the first reported cases was that of PVC resins. Reliance had just commissioned its PVC plant. US companies dumped their products (which were a major import substitute) in India. However, Reliance was quick to catch on and after much lobbying got anti-dumping duty levied.

In another case, Gujarat Apar set up a nitrile butadiene rubber (NBR) plant in 1991. Prices of NBR just before commissioning were ruling at Rs 120 per kg, but later crashed to Rs 68 per kg.

'We were terrified, all our projections were shattered,'' says Dr Narendra Desai, managing director of Gujarat Apar. At first under-invoicing was suspected, but investigations revealed a Japanese cartel was dumping the product. They had a virtual monopoly in Asia and wanted to prevent competition. It took more than a year to get anti-dumping duties on the product.

Gujarat Apar was lucky that it had the FIs support to withstand losses till the imposition of duty. However, not all companies have been so lucky. Red tapism had been the cause of closure for more than 400 Indian companies. The worst affected were the small and medium sector companies and those who had been relying on one or two products.

While it takes only 12 days in Australia and 30 days in the US to impose an anti-dumping duty, in India the duration is more than a year. This delay has caused stoppage of manufacturing of products like sulphadigene. Now chloramphenicol is currently facing dumping. Local players have either stopped production or are operating at very low capacity utilisations.

But one question that arises is whether some sort of pattern exists in the countries or companies that have been dumping. The answer is yes and the culprit is just across the border -- China. In most of the protected products China is the culprit.(see : The Protected Lot).

China can sell its products dirt cheap as it does not have a prudent accounting policy. 'The concept of depreciation is unheard of, power is virtually free and labour is cheap and does not appreciate. They also posess economies of scales', says Yogin Majmudar, managing director of Bakul Aromatics.

But can this be prevented? 'The first step is to change the method of calculating anti-dumping duty' (see box on Dumping Mathematics) says Dr Desai, also president of Anti-dumping Association. Duty levied should be higher of dumping and injury margin. Thus, companies will be insulated from low capacity utilisations (cap. utilisation is used to arrive at a fair market price).

Anti-dumping duty once levied, as per the WTO, is applicable for five years, and is generally not changed. However, the duty calculation involves a component of custom duty. This duty has been falling eroding the level of protection. The anti-dumping association the custom duties

on the protected products untouched and to revert to the peak level of 50 per cent.

And, for products vulnerable to dumping , the formula should be changed.Custom duties should be excluded and the higher of the two margins should be taken. 'Custom duty should, however, be imposed over the anti-dumping duty' says Majmudar. He explains that customs duty is to offset the lack of infrastructure and the high cost of finance in the country.

The key factor for protection is speedy implementation. Currently, for imposing anti-dumping duty the commerce and finance ministry clearance is required. The time lag between the clearances is two to three months. After the commerce ministry clears the duty, the news becomes public, which gives an excellent opportunity to bring in the product at throw away prices.

'Since liberalisation the government has done little to protect Indian industry' cry association members. Says Majumdar 'The Government has to decide between protecting the industries or wanting them to close down by allowing dumping.'

It is quite evident that Indian industry are operating with handicaps of high cost of funds, poor infrastructural facilities and complacent authorities. Unless something is done real fast the list of products under dumping will go on increasing.

Dumping mathematics

Anti-dumping duty under the current formula is levied taking the lower of dumping and injury margin. Dumping margins is the difference between the normal or the market price and the FOB price plus duty, while injury margin is the difference between the fair selling price and FOB price plus duty of the product.

There are quite a few anomalies in this method of calculation. First the fair selling price is determined by the government assuming a capacity utilisation of 90 per cent. This is preposterous as most of the companies affected by dumping are operating at around 50 - 60 per cent utilisation. Next is the problem of duties. At the time of imposing the anti-dumping duties, products were enjoying a custom duty of 85 per cent, but currently this has been reduced to 42 per cent with the peak duty of 50 per cent. Thus anti-dumping duty has been reduced by corresponding amount. This has made the whole purpose of levying the duty fruitless.

Finally by adopting the lower of the dumping and injury margins government is ensuring that the companies are given minimum protection.