OPINION | Indian aluminium sector needs a custom duty re-jig

The cost structure of the secondary aluminium industry makes the distortion even more significant.

Indian MSME secondary aluminium manufacturers are losing market share domestically and struggling to compete internationally. The problem begins with the current tariff structure. Primary aluminium, the key input used by secondary producers, is taxed at a 7.5 per cent basic customs duty. Finished aluminium products from ASEAN countries, however, enter India duty-free under the provisions of the ASEAN–India Free Trade Agreement. This is permissible due to the rule of origin clause, which allows zero-duty imports for products with at least 35 per cent local value addition.

The Imbalanced Tariff Structure

This creates a clear cost imbalance. Secondary producers pay more for their key input than foreign suppliers pay to sell final products in India. The domestic market becomes flooded with cheaper imports, while domestic manufacturers lose market access and, as a result, suffer from lower capacity utilisation.

The pricing behaviour of domestic primary aluminium producers adds further strain. They follow import parity pricing, which keeps domestic prices aligned with the cost of imported metal. This places secondary manufacturers in a double bind. They pay a high domestic price for primary aluminium and face a 7.5 per cent duty if they import the same input. At the same time, they must compete with duty-free imports of finished products.

Cost Structure and Competitiveness Issues

The cost structure of the secondary aluminium industry makes this distortion even more significant. Primary aluminium accounts for nearly 80 per cent of the total cost of their output. Any tariff on the primary metal directly raises the price of every downstream product: extrusions, rolled products, foils, and castings. Even minor increases in input duties translate into large drops in competitiveness.

The inverted duty structure reshapes the market. Imports from ASEAN suppliers are rising because they can sell finished products in India at prices that domestic producers cannot match. Several Indian firms report that buyers now prefer imported downstream products because the landed price is lower than domestically manufactured goods. Many secondary producers are operating below capacity or have exited certain market segments. This is not a consequence of inefficiency; it is a policy-induced cost disadvantage.

Export Competitiveness: A Growing Concern

India’s exporters face similar pressures. Higher input costs weaken India’s ability to compete in global downstream markets against countries where input duties are low or export rebates are higher. When primary aluminium makes up 80 per cent of production costs, a 7.5 per cent duty becomes a direct tax on exports. Competing against countries with lower raw material prices has become increasingly difficult. As a result, many MSMEs are considering curtailing exports or shifting to less value-added products where margins are thinner. This is despite India having one of the richest bauxite reserves in the world. It is estimated that over 40 per cent of Indian aluminium is exported, and this has significant consequences for the economy. If we are unable to add value to our primary metals, we are not capturing sufficient value within our country.

Correcting this structure is crucial for India’s industrial policy goals. The government aims to expand value-added manufacturing, promote MSME growth, and reduce import dependence. The current tariff design for primary aluminium works against these objectives. A reduction in the duty on primary aluminium will lower input costs and encourage higher levels of domestic value addition. Consequently, it will also support employment growth. As of today, around 90 per cent of employment generated in the aluminium sector is in the value-added secondary industries.

The Need for Alignment in Trade Policy

Global trade experience shows that high input duties, combined with low or zero duties on final goods, tend to shift value addition to foreign suppliers. India’s tariff structure in aluminium has created this very outcome. Given that international trade norms typically do not easily allow for the removal of products from FTAs, the approach for Budget 2026 should be to address inverted duty structures by removing duties on the primary product. A competitive downstream sector, largely driven by MSMEs, is central to India’s manufacturing ambitions. Aligning the duty structure with that objective is essential.

(Vinod Kumar, President, India SME Forum.)

Views are personal, and do not represent the stand of this publication.