Small aluminium manufacturers hit by high cost of raw materials

Import parity pricing of primary metal raises raw material costs for entrepreneurs in the domestic downstream aluminium sector, squeezing their margins and hurting manufacturing competitiveness, according to a report.

Despite being the world’s second-largest producer of primary aluminium with an installed capacity of over 4.16 million tonnes annually, the country’s nearly 3,500 downstream and secondary aluminium units — mostly micro, small and medium enterprises (MSMEs) — face significant structural disadvantages, said the report by public policy think tank Policy Consensus Centre.

The report said these enterprises provide almost 90 per cent of employment across the aluminium value chain and supply critical inputs to sectors, including power transmission, renewable energy, railways, electric vehicles, construction and engineering.

One of the most significant challenges for MSMEs, the study said, is 7.5 per cent basic customs duty (BCD), along with the applicable social welfare surcharge, on primary aluminium.

“Domestic primary producers price aluminium on an import parity basis by incorporating customs duties into domestic prices, resulting in downstream manufacturers paying import-equivalent prices even when sourcing metal produced within India,” it said.

This pricing mechanism, it said, substantially raises raw material costs, compresses already-thin operating margins, and weakens the competitiveness of India’s value-added manufacturing sector.

The report also pointed to an inverted duty structure that places a higher tariff burden on primary aluminium than on several finished aluminium products. Simultaneously, free trade agreements with ASEAN, Japan and South Korea allow many finished aluminium products to enter India at concessional or zero duty rates, intensifying competitive pressure on domestic MSMEs.

The report suggested a phased, time-bound reduction of the BCD on primary aluminium to zero, supported by targeted energy cost compensation measures for primary producers to ensure a balanced transition.

It also recommended correcting tariff inversions through measures such as stronger rules of origin, tariff-rate quotas where appropriate, enhanced verification under free trade agreements, and targeted trade remedies against unfairly priced imports.

Rationalising duties on primary aluminium will improve the competitiveness of downstream MSMEs, stimulate domestic manufacturing, encourage higher value addition and support India’s broader objectives of employment generation, industrial growth and the ‘Make in India’ initiative, it said.