Jun 14, 2012

Banning second hand capital goods, the policy perspective

There was an article in the Economic Times today, regarding India mulling about banning imports of second hand plant and machinery, basically capital goods. You can read the full article here. It says:

A panel headed by cabinet secretary AK Seth has decided to ban import of machinery more than five years old. "The big worry is that such imports would impact overall productivity and erode competitiveness of the manufacturing sector," said a government official privy to the development.

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% in 2011-12.

and about the current situation of usage of such goods, it says:


The usage of second-hand machinery is high in certain sectors. For instance, industry estimates show that use of second-hand shuttleless looms constitute about 80% of equipment purchases in the textiles sector.

While the share is 40%-45% in the case of machine tools equipment, it is a high of about 80% for construction equipments such as cranes.



The current foreign trade policy of India allows import of second hand capital goods under para 2.33 as reproduced below:


(a) Import of second hand capital goods including refurbished / reconditioned spares, except those of personal computers / laptops, shall be allowed freely...



This issue is interesting because you can have good arguments from two opposing sides. 


The people who want the ban  give the following arguments (you can also see the CII report here for more points). 
  • Infant industry argument, that our domestic capital industry needs time to mature. 
  • Second hand goods are of lower technology (as they are older and not from the latest generation) 
  • They are less energy efficient
  • We lag in technology up-gradation of our production industries due to usage of these old machines. 
  • Such imports kill our local capital goods industry. (This is basically due to low cost Chinese capital goods that are increasingly flooding India markets. How Chinese keep it low-cost is a different story that will be discussed some other time)
The points seem repetitive, but they all work in tandem to build up the argument of ban supporters. 

The opposing parties give the counter arguments:
  • It is against free-trade principles
  • Our domestic capital goods manufacturers are not able to meet the demand
  • The domestic CG manufacturers don't have the technology to make such machines, even equal to the ones that are supposedly old and second hand. 
  • If a ban or heavy import duty on second hand CG is levied, then our production ability would suffer esp in sectors like textile that rely on such captial goods. They cannot afford costly new capital goods, especially when they are to be imported. 
  • Second hand goods need not mean worn out goods. They can be decent machines of three or four years old that are of fairly good technology. 
Our domestic ability to produce quality capital goods (as per industry requirements) is poor. You can read an interesting report prepared by PwC titled Global competitiveness of Indian Capital Goods industry. As per the report, the Revealed Comparative advantage of our industry is poor, when compared to the countries from where  these goods are being imported. 
However, RCA cannot tell the complete story, and the report goes on to list the factors that has lead to lack of competitiveness, and what steps needs to be taken. DIPP has hosted this report on their server, and I hope that means that they are working on it. 

I was looking at the New trade theory (by Krugman and others) which actually supports a view of protecting domestic infant industries. This part by Korean economist Ha-Joon Chang was interesting:

Japanese companies were encouraged to import foreign production technology but were required to produce 90% of parts domestically within five years. It is said that the short-term hardship of Japanese consumers (who were unable to buy the superior vehicles produced by the world market) was more than compensated for by the long-term benefits to producers, who gained time to out-compete their international rivals.

Your blogger has presented the points. The readers can draw their conclusions.