Grey market can scupper ‘Make in India’

In the context of ‘Make in India’, the current emphasis is on turning India into a manufacturing hub and seizing the opportunity arising out of the slowdown in China. Indian companies should be encouraged to build strong intellectual property and invest in R&D.

A country that can assure potential investors of a reasonable level of return is able to attract investments. It should also ensure that the integrity of the investment is protected. In other words, apart from infrastructure and a hassle-free environment, one needs an administrative set up to check illicit market operations.

The tardiness in enforcing market rules perhaps explains the sluggish progress of the ‘Make in India’ mission, which targets raising the share of manufacturing in the GDP to 25 per cent by 2022 and generate over 100 million new jobs over the next decade.

In an environment where legitimate industry players are up against illicit trade practices such as counterfeiting, smuggling, and piracy, they have less incentive to invest, compared to markets that offer stronger protection of their brands and rights. The availability of large quantity of illicit goods undermines the growth of manufacturing.

In 2012, a Ficci Cascade (Committee Against Smuggling and Counterfeiting Activities Destroying the Economy) study established the existence of illicit markets in seven key industry sectors, the consequent losses to the industry in sales and to the government in revenue.

In 2015, we developed sector-specific reports on illicit markets, estimating the size of grey markets in nine industry sectors, projecting the resultant losses to the industry and government, while also assessing its impact on innovation and investment. The sectors included FMCG packaged goods, FMCG personal goods, automobiles, computer hardware, mobile phones, tobacco, alcohol, broadcasting and motion pictures.

The study — Illicit Markets, a Threat to Our National Interests — released in 2015 estimated that the loss to the indicated manufacturing sectors has increased by 44.4 per cent in just two years, from ₹72,969 crore in 2011-12 to ₹1,05,381 crore in 2013-14. The largest increase is seen in the alcoholic beverages and mobile phones industries, where losses have risen by 151 per cent and 111 per cent, respectively.

On the other hand, the total loss of tax revenue to the government for manufacturing industries estimated for 2014 on account of the illicit markets is ₹39,239 crore, up from ₹26,190 crore in 2012. If incremental costs incurred by the Government on account of welfare measures, enforcement and legislation and interest costs are also estimated, the losses would be significantly higher. Among sectors in the manufacturing industry, loss to the government in terms of revenue is highest from the tobacco industry (23 per cent) followed by mobile phones industry (17 per cent), alcohol industry (16 per cent), FMCG packaged food (16 per cent), and FMCG personal goods (15 per cent). In the motion pictures industry, the loss to the industry during 2014 is estimated to be ₹ 1,300 crore approximately. High tax rates tend to exacerbate illicit markets by creating greater demand for cheap and counterfeit substitutes, since evasion of taxes increases profit margins. High tariffs and taxes create opportunities for those involved in illicit markets to step in. This is particularly true for the tobacco and alcohol industries. These industries are not only highly taxed; the tax structure is complex, and also dual in nature for tobacco products. Besides, there are considerable differences in tax rates between States which open up opportunities for smuggling.

With India’s population expected to touch 1.35 billion and GDP to cross $3 trillion by 2020, the next five years are expected to see an ever increasing demand by the Indian consumers, supported by higher disposable incomes, greater urbanisation and changing consumption patterns. According to a study, 80 per cent consumers in India are victims of counterfeiting in some way or the other. Counterfeiting will undermine efforts to ensure that ‘Make in India’ is a success.

The writer was chairman of the Central Board of Excise & Customs, and is advisor, Ficci Cascade