India has about the highest tariffs on imported goods. Set aside agricultural products, given the distortions that farm subsidies in the EU and the US create. On industrial goods, however, there is no defence for the high tariffs that we continue to levy. At one time, the argument of choice was the delicate balance of payments (BoP) situation, hardly tenable today.

The official position for some years has been that India would reduce her import tariffs. Mr Yashwant Sinha, when he was finance minister, on several occasions stated that Indian duty rates would be brought in line with those prevalent in ASEAN countries. In his Budget speech in February 2003, Mr Jaswant Singh while bringing down the peak rate for industrial goods from 30 to 25 per cent, broadly reiterated this position. ?Rate rationalisation and reduction of peak rates of customs duties has been an integral part of the economic reform in the country. The economy has not only ?weathered? the removal of quantitative restrictions on imports and the reduction of customs duty rates, but has responded by improving its competitiveness and demonstrating the inherent strength.?

The average effective import tariff on industrial goods, including special duty of 4 per cent, is over 20 per cent. The peak rate including the 4 per cent additional duty works out to 30 per cent. That is about three times the rate prevalent in East and Southeast Asia, and in most parts of the world. There is no argument that high import tariffs, besides being indefensible on any international forum, do no particular good to the domestic economy, except create opportunities for rent generation and misallocation of resources.

Today, there is another excellent reason to prune our import tariffs ? and that is the buoyancy of the rupee. Notwithstanding the doubling of our trade deficit for the first seven months of the fiscal (April through October), and the re-emergence of a current account deficit in the first quarter (April-June 2003). The upward pressure on the rupee has been powerful and continuous. Between 31 March 2003 and date, the rupee has gained 4 per cent with respect to the US dollar and lost 8 per cent vis-a-vis the euro, 6 per cent vis-a-vis the pound sterling and 4 per cent vis-a-vis the yen. In holding the rupee there, the Reserve Bank of India (RBI) has seen its foreign exchange reserves swell by $22 billion. For a sense of proportion, remember that in 2002-03, the total merchandise trade deficit was $13 billion.

Without RBI intervention, the rupee is likely to have shot up. Since last December, the Australian, New Zealand and Brazilian currencies are all up by over 20 per cent against the dollar. Whether it is more prudent to go up and down on a roller coaster ride or try travelling along the mean, reducing volatility while remaining broadly aligned to what is still the world?s principal transactional currency, is a difficult question. More so, given that our fastest growing sectors ? information technology and business process outsourcing deal primarily with dollar markets.

However, having chosen to modulate the swings in currency values, it is judicious to try and make the task less onerous, especially given the large side benefits. Cutting the peak rate of import duty to 15 per cent, with lower effective rates for raw materials and intermediates, would at one stroke achieve many wonderful things: (a) It would bring us in touching distance of ASEAN rates (b) Reduce domestic manufacturing costs (c) Encourage value enhancing activities (d) And, by encouraging imports and enlarging the trade deficit, it might take some of the upward pressure off the rupee.

No matter how much salt one uses with respect to the IT/BPO story, the fact is that these revenues, coupled with likely expansion in tourism earnings and a goods export sector that is gaining in strength, make for a strong current account story. Even if portfolio flows were to slow down, they are unlikely to reverse course as long as the economy does well. Therefore, if you believe that the Indian economy is on the rise, prepare for the consequences of that outcome. To begin with, slash tariffs on imported industrial goods.

The author is economic advisor to ICRA (Investment Information and Credit Rating Agency)