Delhi may gain from US-China trade war by slashing own tariffs

A high level advisory group set up by the commerce ministry has advocated reducing India’s overall tariffs to benefit from the ongoing trade war between the US and China. This could help the Narendra Modi government formulate an effective trade policy in its second innings.

“A knee-jerk, tit-for-tat approach on tariffs may not be the soundest one to pursue without greater examination if India faces greater tariffs. It would not be sensible for India to raise tariffs in a US-China trade war. In fact, reducing own tariffs would be a wiser step,” the report said.

India’s average tariff at present stands at 13.8%.

The high level advisory group headed by economist Surjit Bhalla submitted its report to commerce minister Suresh Prabhu on Monday. The members of the group included former foreign secretary S. Jaishankar, former commerce secretary Rajeev Kher, principal economic adviser in the finance ministry Sanjeev Sanyal and former ambassador of India to the WTO Jayant Dasgupta, among others.

The panel observed that after gradually reducing customs tariffs for over two decades under different governments, India’s average tariffs were increased in 2017. “This was followed by a further tariff increase, both as announced in the Union Budget 2018-19 and later again in 2018. This trend needs to be arrested and reversed, with a return to a strategy of generally lower and simplified tariffs to improve the ability of Indian exporters to link up with rapidly evolving global value chains,” it added.

It recommended that India’s upper range of tariffs and the number of tariff rates should be reduced over a five-year period. “The so-called nuisance tariffs (up to 2-3%), which serve little purpose, should be reduced to zero over a three-year period. In certain, very limited number of cases, particularly new technology products, basic customs duties may need to be temporarily increased to provide domestic industry with a pre-announced specified time to become competitive, and the tariff rates decreasing each year towards a lower rate before the increase,” the report added.

India has a unique opportunity to attract more footloose foreign direct investment as many multinational companies are looking for new investment destinations due to rising costs of production in China and the US-China trade war. “A specialized vehicle empowered to secure all kinds of relevant decisions needs to be created that can take quick decisions to identify and attract investors based on pre-defined criteria,” it recommended.