A new research report recommends phasing out basic customs duty on primary aluminium to zero to support downstream MSMEs. The move aims to lower high raw material costs that currently squeeze profit margins for over 3,500 secondary aluminium manufacturers. Investors may monitor how potential duty changes could affect the profitability of large primary producers and the competitiveness of smaller value-added firms.
A report by the Policy Consensus Centre has proposed a time-bound, phased reduction of the basic customs duty on primary aluminium to zero. This recommendation is designed to alleviate intense cost pressure on downstream Micro, Small, and Medium Enterprises (MSMEs) that rely on primary aluminium as their core raw material. The research highlights that these small manufacturers currently struggle with high input costs which account for approximately 80% of their total production expenses.
Impact on Domestic Pricing Models
A central issue addressed in the study is the prevalence of import parity pricing within the Indian aluminium sector. Domestic primary producers often price their metal by incorporating existing customs duties, meaning downstream players pay higher rates even when purchasing domestically. According to the research, this practice inflates costs for downstream units, effectively squeezing their operating margins. For investors, this suggests a potential conflict between the profitability of large primary metal producers and the viability of the broader, employment-intensive downstream manufacturing sector.
Challenges Faced by Downstream MSMEs
India is the world's second-largest producer of primary aluminium, with an annual capacity exceeding 4.16 million tonnes. However, the downstream sector—comprising over 10,000 entities—faces a structural disadvantage known as tariff inversion. In this scenario, the duty on the raw material (primary aluminium) is higher than that on many finished goods. This creates a difficult competitive environment for Indian manufacturers, especially when finished products enter the country at lower or zero duty rates through various free trade agreements with regions such as ASEAN, Japan, and South Korea.
Strategic Adjustments for Competitiveness
The report suggests that simply removing duties may not be enough. It advocates for a balanced transition that includes targeted support to compensate primary producers for energy costs. Additionally, the researchers call for stronger trade remedies, such as robust rules of origin and stricter verification of imports, to protect against unfairly priced goods from abroad. These measures are intended to boost domestic value addition and support India’s manufacturing-led growth objectives.
What Investors Should Track
The potential rationalization of these duties remains a key monitorable. Investors should track whether the government adopts these recommendations, as a move toward zero duty could impact the pricing power and profit margins of primary aluminium producers. Simultaneously, any policy shift could provide a significant boost to the manufacturing competitiveness of the secondary aluminium sector, which supplies critical components for industries like power transmission, railways, electric vehicles, and construction. The final outcome will depend on the government's efforts to balance the interests of large-scale commodity producers with the needs of small-scale downstream value-adders.