Cheap imports threaten bicycle industry

The Indian bicycle industry plays an important role in the growth, development and expansion of the Micro, Small Medium and Enterprise (MSME) sector. India is the second largest producer of bicycles, next only to China, and manufactures around 1.5 crore bicycles every year. The Indian bicycle manufacturing and bicycle components industry is widely recognised for its distinct quality standards and variety in the global market.

Today however, the industry is in deep crisis due to increasing cheap imports from Bangladesh, Sri Lanka, China and low-cost South-East Asian countries. The total imports of bicycles, bicycle parts and components increased to $862 million in 2018 from $637 million in 2011. A half of the total imports are from China and Japan. However, a recent surge in imports from Bangladesh and Sri Lanka has emerged as a major threat for the Indian bicycle industry.

The given chart analyses the imports falling under HSN code 87120010 (bicycles and other cycles, including delivery tricycles, not motorised) from Bangladesh and Sri Lanka.

It is important to note that India’s imports from Bangladesh was $0.14 million in 2011, which rose to $5 million in 2018, reflecting a CAGR of 66.17 per cent. Similarly, India’s imports from Sri Lanka were $1.01 million in 2011 and reached to $22 million in 2018, indicating a CAGR of 55.44 per cent.

Contributing factors

This raises a fundamental question on the factors that could have contributed to the consistent rise in imports in this specific product category from Bangladesh and Sri Lanka. Broadly, there are two standard arguments in this context. First, the import duty on bicycles in India is zero under the Agreement on South Asia Free Trade Area (SAFTA), which provides duty-free access to Bangladesh and Sri Lanka bicycle manufacturers in the Indian market.

On the other hand, import duty in Bangladesh and Sri Lanka is 25 per cent and 30 per cent respectively. High import duty helps Bangladesh and Sri Lanka to protect their bicycle industry.

China imports

However, preferential benefits extended by India cannot be a dominant factor behind the high growth in imports of bicycles from Bangladesh and Sri Lanka. The answer to this lies in the second argument. A large number of bicycle manufacturers in India believe that low-cost Chinese bicycle manufactures are routing their products to India via Bangladesh and Sri Lanka, thereby taking an undue advantage of the preferential market under SAFTA. This is evident from the imports of Bangladesh and Sri Lanka from China. Imports of bicycle parts and components from Bangladesh were $24 million in 2011 and increased to $65 million in 2018. Similarly, imports of bicycle parts and components from Sri Lanka increased were $19.5 million in 2011 and reached to $32.3 million in 2018.

There has been an increase in imports in intermediate product categories, which include frames and forks and parts thereof, hubs other than coaster-braking hubs, wheel rims and spokes, saddles, inner tubes of rubber, threaded screws and bolts, nuts and washers, pedals and crank-gear.

It is important to state that these products are intermediate products, and are used to manufacture bicycles in Bangladesh, Sri Lanka and finally exported as finished products to India. An increase in India’s import of bicycles under the HSN code 871200010 from Bangladesh and Sri Lanka clearly reflects that Chinese low-cost bicycle manufactures are able to enjoy duty-free market access in India without being a party to SAFTA.

In addition, Bangladesh and Sri Lanka bicycle manufacturers prefer to import parts and components from China vis-a-vis India, as the latter is price-competitive. Parts and components imported in Bangladesh and Sri Lanka from China attract low ad-valorem duty due to their lighter weight. This provides an added incentive to Bangladesh and Sri Lanka bicycle manufacturers to import parts and components from China.

RCEP negotiations

Challenges for the bicycle industry are likely to compound with the finalisation of Regional Comprehensive Economic Partnership (RCEP) negotiations, given the fact that a significant volume of the imports are from China. Tariff liberalisation under the RCEP will provide a direct entry to Chinese bicycle manufacturers in the Indian market and threaten the domestic bicycle manufacturing industry.

Way Forward

Given these challenges, it is important for India to adopt a calibrated approach in this regard. India may consider placing a “sourcing restriction” on the use of third-country imported inputs in the exports of Bangladesh and Sri Lanka. This can be done by modifying the existing rules of origin of SAFTA, and it could propose the sourcing restriction with regard to the stages of production, so that Bangladesh and Sri Lanka bicycle manufacturers are encouraged to source from FTA partners.

Such an approach would help India not only restrict imports of bicycles from third countries such as China, but would also contribute to the development of regional value chains in the South Asian region.

It is, therefore, important for India to propose a similar provision in future trade agreements, so that the benefits of preferential market access are not leveraged by non-FTA partners.

Most importantly, it is important for India to keep MSME products such as bicycles in the exclusion list under the RCEP to protect the industry from low-cost Chinese products.

Gupta is Executive Director and Singh is Senior Deputy Director at the Engineering Export Promotion Council, sponsored by the Ministry of Commerce and Industry.

Views are personal