What explains India's high import traiffs

Photo: AFP
Photo: AFP


Low import duties need not boost exports and a selective trade-pact approach could help us replicate other success stories

Decoding India’s tariff and trade policy has become increasingly difficult for trade experts. Conventional trade theories say that trade liberalization through tariff reduction would lead to greater market integration with the world economy. Yet, over the years, India seems to have increased import tariffs for selective products. According to the World Trade Organization’s (WTO) Tariff Profile for 2021, India has one of the highest average tariffs of 15% in the Asia-Pacific region.

What India wants to be and how: The Union budget for 2022-23 talks about an “Amrit Kaal", or a Vision for India at 2047, when the country is expected to become the third largest economy in the world. The government wants to boost “Make in India", reduce import dependence, and promote exports. To achieve these, the previous budget focused on Production Linked Incentive (PLI) schemes to scale up domestic manufacturing. Efforts have been made to reduce inverted duties in sectors like medical devices, which were hampering Make in India. More than 75% of India’s demand for medical devices is met through imports and many studies confirmed that higher import duties on raw materials/intermediate products than on finished medical devices were hampering domestic production. Stakeholder consultations organized by the Indian Council for Research on International Economic Relations (Icrier) on autonomous tariffs versus trade agreements, covering over 30 industries, confirmed that most of the issues related to inverted duties have been resolved. There remain issues in certain sectors like alcoholic beverages where both the final and intermediate products face duties and cesses of around 150% in total, which has been a concern for India’s trading partners and the domestic industry alike. While the industry was expecting this to be addressed in the recent budget, the government may use it as a bargaining tool in its ongoing trade negotiations. Addressing the problem of inverted duties over the last couple of years has led to the rationalization of customs exemptions, imposition of new tariffs and reduction in tariffs for certain products. In some sectors like electronics, this has delivered positive results. India, for example, has started manufacturing smartphones.

What other countries are doing: High tariffs are not uncommon in South Asia. The average MFN tariffs of Bhutan (22.1%), Bangladesh (14%), Nepal (12.2%) and Pakistan (12.1%) are all high, but these countries are yet to integrate well with global value chains. Unlike them, India’s free-trade agreement (FTA) partners like the Republic of Korea (ROK, 13.6%) and Thailand (10.2%) also have fairly high average autonomous tariffs, compared to countries like Australia (2.4%) and New Zealand (1.9%). Interestingly, both ROK and Thailand have been able to develop domestic manufacturing capabilities and integrate well with global supply chains through their trade agreements. India may be looking at the models of Thailand and ROK as it designs its policies.

Learnings from previous agreements: India’s comprehensive economic partnership agreement (CEPA) with ROK has been a key learning experience in the context of domestic value addition. Let us take the example of zinc. According to the United States Geological Survey (2020), India was the fifth largest zinc miner, with a share of 5.67% of global zinc mining in 2019, after China, Peru, Australia and the US, while ROK was not among the top 10 (0.35% share). Yet, after its trade agreements with India, Australia, China and the US, ROK became the world’s leading exporter of zinc, with 10.5% of global exports in 2020. That year, India was the world’s sixth largest zinc exporter, with a share of 5%, and there has been no change in its global rank in the decade till 2020. After the India-Korea CEPA, India’s imports from ROK increased from 9.1% in 2010-11 to more than 50% in 2020-21. In 2010-11, India had a trade surplus with ROK of $124.64 million, but in 2020-21, it had a deficit of $181.23 million. Smart negotiations on rules-of-origin and enhancement of domestic value addition by ROK, which more than doubled its smelting facilities, took Indian industry and policymakers by surprise. At the same time, India is trying to learn from the ROK experience in using high tariffs and trade agreements as a tool to boost exports.

Recent trade agreements and the way forward : India’s previous trade agreements were mostly geo-strategic, but New Delhi is now focusing on greater market access in key export destinations. After withdrawing from the mega-regional agreement, the Regional Comprehensive Economic Partnership (RCEP), and implementing several measures to restrict imports from China, India quickly sealed a deal with its transhipment hub, the UAE. Sectors like gems and jewellery and engineering already see this as a key export-promotion agreement. An early-harvest pact is on the cards with Australia, which is a key partner in supply-chain initiatives along with Japan, which shares similar concerns about over-dependence on China. The first round of negotiations with the UK, with which India has a positive trade balance in both goods and services, was complete by January 2022. And India has relaunched trade talks with the EU. In terms of the selection of export destinations as trade-agreement partners, India seems to have followed the right strategy. It would have been perfect if trade talks could be launched with the US, but Washington is the world’s toughest trade negotiator and it is better to have domestic policy regimes in place for areas like data sharing before such negotiations.

India is also trying to make its domestic subsides/incentive regime WTO-complaint. A huge thrust has been given to quality improvement, product standardization and infrastructure and logistics development, so as to reduce costs and enhance our export competitiveness. In this entire process of restructuring, some industries will gain and others will lose. But overall, there seems to be alignment of trade and domestic policies and an effort to use high tariffs as a tool to: (a) facilitate investment in domestic manufacturing; and (b) bargain for greater market access in trade deals through reciprocal tariff reductions and also in areas like regulatory compliances and mutual recognition of technical standards. The next couple of years will be crucial to understand whether India can replicate the success story of countries like ROK and Vietnam.

These are the author’s personal views.

Arpita Mukherjee is professor, Indian Council for Research on International Economic Relations

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