Monnday?s report that the government may raise customs duty to protect domestic industry from the surge in imports following the impact of the rising rupee only highlights how little the country has moved from the control mindset of the pre-reform era, when it habitually used to micromanage all flows in and out of the economy, as if the government knew better than markets how various balances are to be struck. Putting up tariff rates at this juncture would mean importers pay more for imports, which would increase all-round costs in the economy and threaten another bout of inflation, thus raising the spectre of higher official interest rates. At a time of gushing capital inflows, and when there is already much confusion over whether a rupee pegged to the US dollar, with capital largely free to flow in and out, means importing America?s (currently softening) monetary policy in toto, harder signal rates are the last thing India needs. Exporters who see relief from a strong rupee in cheaper imports (of inputs) will be especially displeased by any raising of tariffs.
The origin of this protectionist suggestion seems to lie in slippages in the latest Index of Industrial Production (IIP) figures, which show that manufacturing sector growth slowed by almost half, to 6.6%, in September 2007. But a closer look would show that the main reason for the slowdown was the tumble taken by the consumer goods sector, where the pace of output growth of items of daily consumption fell to a low of 2.2%, while the production of consumer durables actually turned negative, declining by 7.6%. An across-the-board increase in tariffs will do little to protect domestic manufacturers of consumer goods, as their presence in India?s import basket is restricted to agricultural products and a smattering of high-value branded products. The hardest hit by an increase in tariffs would be capital goods, petroleum products and export-related imports, which account for roughly 70% of total imports. The result would be hardening prices, which could spell a faster slackening of demand?not what the economy needs right now. As it is, India has some of the highest tariff walls in the world. Once lowered, these should not be raised again, period. Knocking down market barriers should be a matter of policy consistency.
