Keeping step with Asia

Plenty of reasons to reduce import duties

While the Union finance minister is expected to restructure customs duties in the forthcoming budget, it remains to be seen what he will do with duty rates. It is possible to argue that with the downturn, and industry and agriculture suffering, this is not the best time to reduce protection. The commerce ministry could well add another argument. Industrial tariff negotiations at the World Trade Organisation begin later this month and involve reduction commitments. For products with bound rates, the base for reductions will be bound duties. But for products without bound rates, the base can become applied rates. Hence, unilateral reduction is undesirable.
Every sensible trade economist will, of course, argue that duty reductions coupled with rupee depreciation can help boost export competitiveness as well as offer a more acceptable form of protection to domestic industry. The problem is with the latter clause. The bane of Indian exchange rate management has been capital and invisible account inflows, leading to upward pressure on the rupee and the relative foreign exchange mountain. Reduced duties and capital account liberalisation can stimulate demand for dollars, but may also enhance supply. Artificial Reserve Bank intervention can, indeed, help the rupee drop and the resultant liquidity will not constitute a major problem, given the present low rate of inflation.

However, this is not a permanent solution. While exchange rate management is bound to be messy, there are compelling arguments in favour of reducing duties. Globally, import duties are headed southward and the Asean-plus-three programme plus a plethora of free trade arrangements make India’s high duties stick out, apart from making it a high cost economy. In three years, Mr Sinha is also committed to reducing peak duties to East Asian levels of 20 per cent. Without duty reductions in the first of these years, this target is hardly credible. This suggests a 5 per cent drop in the peak rate to 30 per cent in this budget. However, caveats are necessary. First, duty reductions should be across the board and consumer goods like second-hand cars don’t merit differential treatment. Second, duty reductions should cover agricultural products as well as manufactured ones and there is a rationalisation issue here. Edible oils are edible oils. Is there any rationale for a 45 per cent duty on soyabean oil, a 75 per cent duty on others and a 300 per cent duty on palmolein?
Third, resistance to duty reductions in agriculture causes unnecessary embarrassment. For instance, effective duties on imported liquor are 700 per cent plus. Was there any need to resist a 12 per cent reduction in the basic import duty on liquor and fall foul of WTO commitments, as happened in the 2001-02 budget?