By Vikram Marakar
The widening demand-supply gap in natural rubber in India has increased the dependence on import for the consuming industries. However, import of natural rubber by the domestic rubber industry is facing various challenges such as high import duty, restriction on ports of import, pre-import condition, reduced export obligation period etc. If imports are made unviable and demand is not met by domestic production, the Indian rubber products manufacturing industry hardly has any option but to either reduce the capacity or shut down.
The demand-supply gap in natural rubber for domestic market has been increasing over a period of time. During the previous financial year, the demand-supply gap stood at 45% (April 2018 to January 2019).
Consumption of natural rubber by the domestic industry touched a record high of 1.025 million MT during the period April 2018 to January 2019, as per the data released by the Rubber Board. However, during the same period rubber production stood at 560,000 MT.
Even during the earlier financial year i.e. April 2017 to January 2018, consumption of natural rubber by thedomestic industry was 913,000 MT against natural rubber production of 597,000 MT. To be precise, there was a gap between consumption and production of natural rubber to the tune of 316,000 MT during the period April 2017 to January 2018 which increased to 462,000 MT in the subsequent financial year — April 2018 to January 2019.
The above figures clearly demonstrate that while consumption increased by 12% on YOY basis, the production of natural rubber, in fact, decreased by 7% on YOY basis, thus even further widening the gap. If serious steps are not taken to reduce this gap between supply and demand of natural rubber, this may have serious repercussions on the domestic rubber industry.
Rising demand—sign of growth
The increase in natural rubber consumption on YOY basis as highlighted above is a clear indication that the Indian rubber industry is on a growth path. The Indian rubber industry, especially non-tyre sector, is mainly dominated by labour-intensive processes. There are over 1,300 members of AIRIA from such non-tyre sector which employ a large work force and have the potential of increasing/generating more employment, if supported and nurtured suitably.
The tyre industry, one of the largest consumers of natural rubber, has already committed to increasing the production footprint in the country. Besides, a large number of micro, tiny, small and medium rubber industries are buoyant on demand of rubber goods which is clearly reflected by the significant growth in the consumption of natural rubber (12% on YOY basis).
The present domestic natural rubber production is capable of satisfying only 55% of the total natural rubber consumption in the country. This stark gap in demand and supply has increased dependence on import for the consuming industries. However, import of natural rubber by the domestic rubber industry is facing various challenges such as high import duty, restriction on ports of import besides other restrictions such as pre-import condition and reduced export obligation period of 6 months which are mainly applicable to exporters of rubber goods.
The shortage of natural rubber is mainly due to reduced production trends and increased consumption by the rubber industry. The increase in consumption of natural rubber is a good sign as it indicates growth of rubber industry. Such growth, if nurtured and sustained, will lead to higher employment, higher collection of taxes and higher foreign exchange earnings, all of which are extremely crucial for the Indian economy.
Problems in NR imports
The problems relating to import of natural rubber can be classified into two categories:
Problems relating to rubber industry which are importing natural rubber for manufacturing the product for domestic consumption:
Such manufacturers are required to pay high Customs duty for import of natural rubber which is 25% ad valorem against the Customs duty of 10% which is applicable for almost every raw materials needed for production. This increases the cost of production for the Indian rubber products industry and makes it uncompetitive when compared with price of similar products imported from China and other countries.
Besides higher Customs duty (tariff barrier) the import of natural rubber is restricted to only two ports, i.e. Nhava Sheva port and Chennai port, and therefore importers are constrained to import natural rubber from these two ports only.
The rubber product manufacturers, scattered over various parts of the country, are required to bear the high cost of transportation as they can’t import natural rubber to a Port/ICD/CFS closer to their location. It is relevant also to point out that, in normal course when the import is effected to an ICD/CFS located in hinterland away from port, the Ocean freight and Rail/Road freight are bundled together which is much cheaper when compared with the cost of de-stuffing the containers at gateway ports and taking delivery by loading it on trucks and their movement via road.
(b) Problems relating to rubber industry which are manufacturing the product for exports:
The exporters of rubber products use either Advance Authorization or EOU scheme for importing natural rubber required for manufacturing the export product. The Advance Authorization scheme imposes a pre-import condition for natural rubber which compels the manufacturer exporter to import first and export later and thus they are precluded from using domestic natural rubber in export product. Due to this, their manufacturing cycle increases by 4 to 6 weeks and makes them uncompetitive on the delivery front when compared with other global suppliers of similar product.
Advance Authorization scheme generally provides an export obligation period of 18 months for majority of the export products. However, in cases where natural rubber is one of the raw materials used in the export product, the export obligation period is reduced to 6 months. This unreasonable condition places the Indian exporter of rubber product to a huge disadvantage as they are unable to take long order books where deliveries may be intermittent but substantial over a period of time but not necessarily within 6 months.
Exporters are thus constrained to import only limited quantity of natural rubber for which they have firm orders in hand as they can’t import in anticipation of getting an order due to fear of defaulting on limited EO period of 6 months.
It is also relevant to point out here that, while port restrictions have been removed for Advance Authorizations on the ground that NR is being imported for using in export product, the “Export-Oriented Units” (EOUs), which are dedicated manufacturing units for exports, have no such relief, and for them the port restrictions continue.
Remove import restrictions
AIRIA is of the opinion that whilst the government must take steps to increase the production of natural rubber by providing support to natural rubber growers, it must not impose tariff and non-tariff barriers on import of natural rubber with the aim of reducing imports. Such measures may help natural rubber growers, in short term, by giving them higher price realization due to demand-supply gap.
However, it will impede the growth of the rubber industry which, in turn, will affect the generation of employment, collection of taxes and export earnings in this sector despite having the potential for the same. In the long run, such measures will be counter-productive and affect the natural rubber growers as the demand will fall over a period of time as many industries will resort to either reducing their production or shutting down due to non-viability of business.
In order to meet the current gap of 45% between production of natural rubber and consumption, obviously the rubber product manufacturing industry is required to be dependent on imports. Another aspect which must be considered is that a significant percentage of manufactured rubber products are exported across the globe, thus bringing the much needed foreign exchange to the country.
Such exporters are entitled to import their raw material without payment of any Customs duty (duty-free) for which purpose many of them avail Advance Authorization as per the provisions laid down under the foreign trade policy of Ministry of Commerce. However, the manufacturing units which are engaged in exporting their entire production use “100% Export Oriented Units (EOU) scheme” which entitles them to bring all their raw material duty-free.
In the current scenario, both the sectors — non-exporting / exporting – are dependent on import of natural rubber due to the huge gap in demand and supply which is almost 50% today. The concerns of the Indian rubber industry are further enhanced due to the fact that the production of natural rubber in India is falling on YOY basis.
Against this backdrop, if imports are made unviable and demand is not met by domestic production, the Indian rubber products manufacturing industry hardly has any option but to either reduce the capacity or shut down.
(This article is based on the author’s email interview with Rubber Asia. Author is President of AIRIA (All India Rubber Industries Association)