Tariffs should be tapered off after building globally competitive domestic businesses: Niti Aayog member

New Delhi: Tariffs aimed at protecting domestic industries from foreign competition have to be gradually tapered off as these industries learn to stand on their feet, Niti Aayog member Arvind Virmani said. 

According to the former chief economic advisor in the finance ministry, tariffs are effective only if they help in building globally competitive domestic businesses. His comments follow recent threats of reciprocal tariffs against India and other countries by US president Donald Trump.

In India, the thinking behind tariffs during the 1991 economic reforms was to help the domestic industry become competitive and to then reduce these duties gradually over time.

“It is a good approach and if we can get something in return through a bilateral trade deal, that is something even better,” said Virmani, who was in the finance ministry during the period of 1991 reforms. 

“For (tariff) protection to be effective, it must create companies which are competitive in the export market, which means tariffs must gradually come down. It is called infant industry protection and at some point, one has to stand on one’s own feet,” said Virmani in an interview.

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But its timing has to be thought of carefully and negotiated, he said. “It cannot be out of the blue, just because we have not lowered it for a long time." 

On what advantage India could expect from a trade deal with the US, Virmani a recommended a framework facilitating free movement across the two countries for goods that go into products like electronic goods that have a complex supply chain—that is, requiring value addition in different places. 

These products require components and sub-assemblies to move from place to place for value addition before the final product is arrived at. 

“It is a network. What we want in a network is to have a partner with a lot of electronics demand—whether it is the US or the EU – so that movement of goods is facilitated so that everything which is labour-intensive can come to India and go back there,” Virmani said.

“So US companies should find it easy to bring parts in, assemble it, take it back and put it into something else and a low tariff structure to facilitate that. We want to have this back and forth so that they can set up plants here for certain parts of the supply chain. That is the objective of facilitating supply chains through tariffs,” said Virmani.

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However, the design of such supply chains has to be carefully structured so that near-zero import tariff benefits only those products that have high-cumulative mutual value addition. That is, the two countries could have near-zero customs duty on certain products from each other. Suc low tariffs would apply to goods that are nearly fully locally made in the two partnering countries, with minimal input from any other country. 

This would strengthen the supply chain between the two nations. On items produced in either of the country with a high level of inputs from third countries, bilateral tariff concessions between India and US are not needed as the benefit would go to those third countries from where inputs originate, Virmani said. On such products, import tariffs could be increased by both the countries on mutual understanding.

The timing of the tariff phase-out is also critical: “It cannot be out of the blue, just because we have not lowered it for a long time.”

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Virmani's remarks come as government officials increasingly signal to the domestic industry to prepare for protection phase-outs. Higher basic customs duty rates wherever introduced to protect the domestic industry from global competition, cannot continue perpetually, Central Board of Indirect Taxes and Customs (CBIC) chairperson Sanjay Agarwal said in an interview with Mint published on 24 July last year. 

India is currently talking to high-income developed countries such as the US, UK and EU for bilateral trade deals, which are expected to involve mutual concessions for greater market access. 

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