The Indian paper industry has been facing a unique challenge: paper demand is increasing at a compound annual growth rate of 7 per cent, but a number of paper mills have either shut down or scaled down their operations. According to the Department for Promotion of Industry and Internal Trade (DPIIT) annual report 2022–23, out of the over 900 paper mills in the country, only 553 are currently operational.

The development has not been sudden as the import of paper and paperboard increased from ₹1,136 crore in FY 2020-21 to ₹3,179 crore in FY 2022-23 from China, from ₹835 crore to ₹2,030 crore from ASEAN, and from ₹373 crore to ₹728 crore from South Korea. With imports rising by 28 per cent to ₹3,153 crore in the first quarter of FY 2023–24 compared to the year-ago period, things have worsened for the paper industry.

The dampeners

Three issues have played a key role in the decline of the paper industry. The first is the government’s policy of extending preferential import tariff to foreign paper/paperboard manufacturers of certain countries through free trade agreements (FTAs) and other bilateral and multilateral trade accords. The second is the high cost of fibre (paper pulp is generated from various types of fibre), the raw material for the paper industry. And third, the domestic paper industry, which is characterised by high capital requirements and modest profit margins, has been surviving on used machinery imported from the US, Canada, Finland and other European nations over the past 15 years.

To fix the first issue, the government should eliminate concessions on basic Customs duty for paper and paperboard imports from China and reintroduce Customs duties on imports from ASEAN countries and Korea, aligning them with rates applicable to the rest of the world. Paper and paperboard should be excluded from preferential or nil import tariff treatment when reviewing existing FTAs and crafting new ones.

Due to the paucity of fibre in India, Indian paper mills have to depend on the US and Europe for waste-paper or cuttings, which attract a Customs duty of 10 per cent, a social welfare cost of 10 per cent on Customs duty and an IGST of 5 per cent, totalling 16 per cent of the cumulative duty.

More than half the paper mills in India were built more than 20 years before those in China, where more than half the paper mills were built only 10 years ago. Hence our production capability is lower than that of China. However, Indian paper mills cannot survive commercially by investing heavily in the latest equipment, and hence look to import refurbished second-hand machinery. To protect existing and future investments in capacity expansion, such second-hand imports should be eligible for zero-duty under the EPCG (Export Promotion Capital Goods) scheme.

The other measures that could improve the ease of doing business are: The Directorate General of Foreign Trade (DGFT), upon issuing an Export Obligation Discharge Certificate (EODC), explicitly states the fulfilment of export obligations and the automatic cancellation of all associated bonds/LUTs. This declaration should be integrated into the online system to ensure synchronisation with Customs department records.

The existing requirement of a one-year timeframe for submitting the Installation Certificate as per the FTP should be extended to a minimum of two years, with the possibility of an additional 18-month extension subject to necessary approvals.

Though the EPCG licence application is digitalised, post-licence issuance modifications, like adjusting equipment lists or shipment divisions, require a cumbersome manual process. To enhance this, importers should be allowed to revise item lists (within existing items and sub-items) online to accommodate evolving shipment plans. Thereafter, DGFT should promptly approve these modifications, either within a week or automatically thereafter.

The writer is a public policy analyst

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