How Tariff Policies Are Undermining Value-Added Manufacturing

Aluminium is one of the foundations of modern industrial economies. It is essential for power transmission, renewable energy, electric vehicles, railways, construction, packaging, aerospace, defence, and a wide range of consumer and engineering products. As India accelerates investments in infrastructure, clean energy, advanced manufacturing, and electric mobility, demand for aluminium and aluminium-based products is expected to grow rapidly.

India is well positioned to benefit from this opportunity. The country has abundant bauxite reserves, integrated refining and smelting capacity, and access to relatively low-cost power. These advantages have enabled India to become one of the world's largest and most cost-competitive producers of primary aluminium.

However, India is not fully capturing the economic benefits of its aluminium resources. While primary aluminium production has expanded, downstream industries that convert aluminium into higher-value products face rising pressure. Current tariff policies allow primary producers to earn high margins while forcing downstream manufacturers to pay elevated prices for aluminium and compete against low-duty imports of finished products.

As a result, India is increasingly exporting aluminium in primary form and importing higher-value aluminium products. This weakens domestic value addition, reduces manufacturing competitiveness, and limits opportunities for investment, employment, and exports. In effect, India risks becoming a supplier of raw material while other countries capture the greater economic benefits from processing and manufacturing.

China has followed a different path. It treats aluminium as a strategic industrial input, allows duty free import of primary metal, discourages exports of primary metal, and channels aluminium into domestic manufacturing. This has helped China build globally competitive downstream industries, generate higher exports, and create millions of manufacturing jobs.

India needs a similar shift in policy. The objective should not be merely to produce more aluminium, but to maximize value addition within the country by ensuring competitive access to aluminium for manufacturers and encouraging the production of higher-value goods.

Key Challenges
India’s tariff policies have created three major distortions in the aluminium value chain—encouraging metal exports, inflating raw material costs for manufacturers, and increasing dependence on imported finished products.

1.         India exports a large share of its aluminium in primary form instead of converting it into higher-value products. In 2025-26, India exported about $7 billion worth of aluminium and aluminium products. Of this, 61.4% was aluminium metal and only 38.6% was finished products. In contrast, China exported $42.5 billion worth of aluminium products in 2025-26, with 97.2% of exports consisting of value-added products and only 2.8% aluminium metal. China discourages exports of primary aluminium through measures such as a 30% export duty on Aluminium ingots and restrictions on VAT rebates. As a result, more aluminium is available for domestic manufacturing, generating higher exports, jobs, and investment.

2. Aluminium accounts for 60–80% of production costs for downstream manufacturers. Yet Indian manufacturers do not get aluminium at globally competitive prices. Domestic primary producers price aluminium based on the global LME price plus the 7.5% import duty, a system known as import-parity pricing.

As a result, Indian manufacturers pay a price as if they were importing aluminium, even when buying from domestic suppliers. The 7.5% duty allows primary producers to charge Indian buyers more than from foreign customers, raising costs for over 3,500 MSMEs in the downstream sector and reducing their competitiveness.

3. Aluminium is a key input for government-funded infrastructure, including power transmission, railways, metro systems, renewable energy projects and defence equipment. Roughly one-quarter of India's annual aluminium consumption of 6–7 million tonnes is linked to public-sector projects. Yet domestic primary aluminium is priced as if it were imported. Under the import-parity system, producers charge the global London Metal Exchange price plus the equivalent of India's 7.5% import duty, even when the metal is made in India. Because aluminium typically accounts for about 40% of the cost of many aluminium-intensive products, this pricing practice raises their cost by roughly 3% (40% × 7.5%). The result is that taxpayers effectively pay more for infrastructure and public procurement than necessary. Removing the import duty would lower project costs, improve the efficiency of public spending, and strengthen downstream manufacturing.

4.         India imported about $4.1 billion worth of finished aluminium products in 2025-26. Many of these products compete directly with Indian manufacturers in sectors such as cables, conductors, packaging, engineering goods, and auto components. About 25% of these imports entered India at low or zero duty under FTAs.

This creates a double disadvantage. Indian manufacturers pay inflated prices for aluminium input because of import-parity pricing, while imported finished products often at lower tariffs compete with their products. Foreign producers can buy aluminium at global prices and sell finished products in India at zero duty, while Indian firms face higher input costs in their own market and compete against cheaper finished imports in their own market.

Economists describe this as an inverted duty structure—a situation where domestic manufacturing becomes less attractive than importing finished products.

Reforms Needed
Addressing these distortions requires a set of policy reforms aimed at making aluminium available at competitive prices, encouraging domestic processing, and supporting value-added manufacturing.

1.         Remove the 7.5% Duty on Unwrought Aluminium so that Indian manufacturers can access aluminium at globally competitive prices.

2.         Correct Inverted Duty Structures. Ensure that duties on raw materials and intermediates remain lower than duties on finished products. Review FTA concessions that allow finished aluminium products to enter India at low or zero duty.

3.         Impose a 20% Export Duty on Aluminium Metal. Discourage exports of primary aluminium and encourage domestic value addition. India should follow China's approach of imposing 30% export duty on aluminium ingots keeping more aluminium available for domestic manufacturing.

4.         Support Downstream Manufacturing. Provide targeted support, including PLI-type incentives, to aluminium-using industries such as cables, conductors, packaging, automotive components, engineering products, aerospace parts, and renewable energy equipment. These industries generate far more jobs, exports, and economic value than primary aluminium production alone.

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