The government has finally woken up to the fact that the unbridled import of used equipment has been eroding the competitiveness of the manufacturing sector and so, have decided to ban import of machinery more than five years old.

Recently, a panel headed by cabinet secretary AK Seth decided to ban the import of machinery more than five years old. The domestic capital goods industry says imports are partly responsible for the drop in output, a contention supported by government data that showed production of capital goods contracted 4.1 per cent in 2011-12. As per reports, the usage of second-hand machinery is high in certain sectors; while the share is 40-45 per cent in the case of machine tools equipment, it is about 80 per cent for construction equipment like cranes. The government is also considering an import duty of 75 per cent of the original value of machinery, which will drive up the cost for importers.

?That is a good move from the government?s part. We have been talking to them about this for many years now. What is happening today is that much equipment that is imported is very old and do not meet the current emission norms and safety standards, whereas the majority of equipment manufactured here in India conforms to the current norms and regulations. This situation has a negative impact not only on the industry and there is also the possibility that India is being treated as a junkyard. So the proposed move to regulate the import of used equipment with certain norms and conditions is definitely a welcome move,? says Glenville da Silva, Chairman, Indian Earthmoving & Construction Industry Association, and Vice President Business Development Asia, Volvo Construction Equipment.

Clarifying the association stand on the issue, Da Silva says, ?At no time have we talked about banning the import of used equipment. It is required because there are certain areas for which used equipment offers a better value than new ones. We definitely support the import but what we have been stressing is that the import should be regulated so that right type of equipment comes in, and not any kind of equipment. We are basically looking at regulation in terms of the age of equipment, the performance of the equipment in terms of safety norms and emission norms, and how it is brought into the country. These were the few suggestions that were given to the government.?

Says Somnath Bhattacharjee, President ? Material Handling Solutions and Equipment & Project Solutions Business, TIL, ?As the imports are partly responsible for depressed demand for indigenously manufactured capital goods, the entire capital goods manufacturing industry is likely to experience a bit of elevated demand in the short term due to higher import duty on used capital goods or ban on certain items.? He points out that India has developed significant manufacturing capabilities in the capital goods sector over the years. Besides partnering with global technology leaders, Indian capital goods manufacturers have also significantly improved upon their own competitive edge in areas of capacity, engineering capability, cost, productivity and quality.

Bhattacharjee further adds, ?Imposing restriction on import of used plant and machinery is unlikely to impact the end users adversely, especially in terms of availability, quality and total cost of ownership. Although new equipment commands a higher acquisition cost, it eventually delivers a better total cost of ownership due to better uptime, upgraded specification and features resulting in enhanced productivity and profitability for end users.

Also, it will provide a level playing field for indigenous manufacturers, besides motivating the Indian companies to bring in more investments. In the short term, while there are signs of slowdown in economic activities, this move of the government will definitely boost the demand for locally manufactured products.?

Vipul Gupta, Director, Vipul Sameer Agencies, begs to differ. He says, ?We don?t view this development as a positive development. If we analyse the matter, import of used machinery is primarily because of two reasons: good quality of options available in overseas markets due to better maintenance standard of equipment, and lower costs.?

He elaborates, ?Often, the cost of used machines imported is equal and even more than the new ones available in the country but some buyers still prefer to buy from overseas mainly due to the good quality. The Indian market is now overcrowded with almost all global payers setting up their manufacturing bases here due to the infra boom in the last decade, but we still feel that due to intense competition and high levels of indigenisation of parts, the machines being produced here are not among the best in the world. Moreover for specialised jobs, some of the kind of machinery required is not being produced in the country. The contractors have no choice but to go for imports.?

According to Gupta, the manufacturing sector has to gear up to produce world-class machines and also increase their product portfolio to match global profiles. This will ensure that India is not the only market for them, they can take advantage of lower costs to sell the machines overseas, too.

He adds, ?Just providing tariff cover will not solve the problem. In the increasingly globalised business, such actions are only aiming at short term relief and not helping in the larger time period. Import tariffs cannot be put on a blanket basis but the government should set guidelines on the kind of equipment/machines that can be imported, taking into consideration the need of the market and the availability. It should also provide local producers with attractive incentives for exports, to get them to compete globally both in quality and price.?

Divakar Marri, Head - Corporate Planning & Program Management (PMO), Ramky Infrastructure, says, ?This ban on import will have both pros and cons. As the Capital Goods (CG) industry is considered as an important industry of all the manufacturing industries, it is essential to encourage manufacturing of capital goods rather than import and enhance the value addition and technology transfer. At the same time, as our domestic CG industry is still in nascent stage and this ban or heavy import duty on second hand CG would affect production ability increasing in capital cost of the project, etc. On a positive note, the domestic CG industry should strive to increase their capability in technology upgradation and as this restriction on import is only on plant and machinery which are used for more than five years, this would be a welcome step to safeguard the productivity and competitiveness of Indian manufactures.?

Speaking on the impact on the equipment rental, Gupta says, ?The rental industry will be affected in the near future. Most rental companies are trying to reduce their capital and running costs due to severe strains on revenues. Such a move will either increase the cost of rentals in the future or force the contractors to buy their own equipment if the rental companies do not buy them.?

But according to Da Silva, the impact will be negligible. He says, ?Rental companies are dependent on import for speciality equipments like piling rigs and things like that. I don?t think they are too dependent on imported equipment for anything that is made in the country and I firmly believe that what is made in the country is definitely more cost-effective.?

Will the proposed move on putting 75 per cent additional costs on the original value of machinery adversely impact the contracting fraternity? Gupta says, ?For most of the ongoing projects, the contractors would already have made their purchases and for future projects, the increase in the cost will be factored in, when the bids are prepared. Most contractors even now import out of necessity due to the nature of the job or limitations of size/time/metallurgy/working life of the locally manufactured machines. Change in costings will have an effect across the market and will ultimately increase the costs for the government, which will hit the customer in most projects directly or indirectly.?

He further points out, ?Some sectors that will benefit are those which were facing unfair competition due to dumping done by companies, mostly Chinese. Industrial machinery producers will also be benefitted as imports from low-cost countries will become more expensive and importers will desist from flooding the market with cheap products.?

Marri says, ?This import duty levied will surely affect the business and as said earlier it cannot be levied in the near future, till the domestic CG industry develop and restructure technology infrastructure and improve their technological capabilities and competitiveness to the global standards.?

Ban on equipment over 5 years 75% proposed import duty on the  original value of equipment

What the industry look for:

Age restriction
Specified entry points
Third party certification
Comply with safety and emission norms