Over the last decade, India's manufacturing and export industries have grown rapidly and significantly, with the goal of becoming a manufacturing hub for products ranging from automobiles to pharmaceuticals and electronics. Despite this progress, manufacturing has remained largely reliant on foreign producers for raw materials, parts, and consumables such as Active Pharmaceutical Ingredients, spare parts, semiconductors, yarn, and other items. This is why the Covid-caused disruptions in the international supply chain last year also brought the Indian manufacturing industry to a halt.The automotive and electronic industries are still dealing with a shortage of semiconductors, which has resulted in a slowdown in production in the last quarter. This emphasizes the importance of manufacturing self-sufficiency by developing capabilities for producing raw materials, consumables, and intermediate goods.
To promote domestic manufacturing, Finance Minister Nirmala Sitharaman announced in the 2022 Union Budget speech the withdrawal of customs exemption on over 350 tariff items, the majority of which are raw materials and consumables used in the manufacture of finished goods. This announcement was long overdue, having been hinted at in her previous budget. The 2021 Budget proposed a thorough review of customs exemption notifications, which would be carried out through stakeholder consultations. To that end, the Narendra Modi government conducted a crowdsourcing exercise to identify customs duty exemptions and listed notifications in order to solicit stakeholder feedback. These crowdsourcing exercises and industry suggestions are being considered in the 2022 Budget proposals for these exemptions. The consultative approach is a welcome measure and a one-of-a-kind step forward in India's evolving budget framework.

Encouragement for domestic manufacturing
The theme of these tariff changes and the review of the entire customs duty exemption framework is to provide the impetus for domestic manufacturing of raw materials and consumables in line with the Modi government's flagship initiatives such as the Make in India initiative and the Production Linked Incentive (PLI). The increased tariff on inputs is expected to nudge domestic industry to manufacture goods in India and discourage imports.

For example, the customs duty exemption on raw materials and consumables used in garments and textiles, such as spindles, yarn guides, and control rings, has been withdrawn. Furthermore, all intermediate and raw material-related exemptions are evaluated in terms of their usefulness for domestic manufacturing and are proposed to be phased out gradually. According to the Budget proposals, all final product-related exemptions are also pruned or omitted.

Furthermore, concessional duties on raw materials used in the manufacture of intermediate products are provided to encourage domestic production of intermediate products — a concessional rate of duty has been prescribed for components of transformers used in mobile phone chargers and cameras lenses used in mobile camera modules.

India's domestic manufacturing is being pushed.
The goal of such changes is to give the domestic manufacturing industry a more holistic boost. The entire Project Imports Scheme and capital goods framework will be redesigned. Exemptions on capital goods have hampered the growth of the domestic capital goods sector, according to the Budget speech. Furthermore, project import exemptions have denied local producers a level playing field, highlighting areas such as coal mining projects, power generation, and metro projects.

These Project Imports Exemptions are unique to India and were designed to exempt all inputs and capital goods for large infrastructure projects. The government has implemented a tariff policy with reasonable tariffs set at 7.5%, which is beneficial to domestic industry growth. It is proposed that concessional rates on capital goods and project imports be phased out gradually to avoid a reactive mode and to allow time for existing projects to obtain exemptions.

This is a significant change because project imports and capital goods exemptions are inextricably linked with the Foreign Trade Policy concessional framework. As a result, any change in the customs regime implies an impending change in the Foreign Trade Policy, which is expected to be unveiled in the coming months. This modification must be linked to the replacement of the current Special Economic Zones Act, 2005, which was announced as part of the Budget proposals. As a result, the new law is expected to be more regulatory in nature, with fewer fiscal benefits than the SEZ Act.

Time to tilt the balance in India’s favour
These large-scale changes demonstrate India's willingness and determination to promote domestic manufacturing. They send a clear message that India is willing to go to extreme lengths to tip the balance of international trade in its favour. It is worth noting that a special regime has been devised for the textile, chemical, and metals sectors, which removes the exemption for items that are already manufactured or can be manufactured in India. Customs duties on certain chemicals, such as methanol and acetic acid used in petroleum refining, are being reduced. Simultaneously, the customs duty on sodium cyanide, for which sufficient domestic capacity exists, has been raised.

The proposed changes are extensive and are likely to have an impact on domestic manufacturing. With a long-standing goal of achieving manufacturing self-sufficiency, the policy appears to gradually reduce imports of consumables and raw materials, with a focus on Micro, Small, and Medium Enterprises (MSMEs). One such step would be an increase in import duty on umbrellas, with a corresponding withdrawal of exemption for parts of umbrellas.

The proposed changes are significant because they have moved away from cherry-picking industries and instead have made it all-encompassing. An overarching goal is to implement holistic changes in customs tariffs with a clear direction to pivot the economy toward self-reliance and self-sustenance.