No import surge after tariff cuts

Updated: Nov 17 2005, 05:30am hrs
Import liberalisation through tariff cuts has not led to any dramatic influx of foreign goods. In general, exports grew faster than imports and the effect of tariff reduction has been less favourable on consumer goods industry than on capital and intermediate goods manufacturers, according to a recent study.

Significantly, tariff cuts have not changed industrial composition in favour of labour-intensive industries.

Despite substantial trade liberalisation (peak customs duty was reduced from 150% in 1991-92 to 15% in 05-06), there has been only a small increase in import penetration ratio. Import penetration ratio for intermediate goods increased from 0.13 in 1986-90 to 0.18 in 1996-00, while that of capital goods increased from 0.12 to 0.19. As for consumer goods, however, import penetration was comparatively stronger from 0.04 to 0.10.

As per the study by Dr Bishwanath Goldar, exports are generally found to be growing at a faster rate than imports. The study attributes this trend to a clutch of factors such as pro-competitive effects of tariff reduction on exports, increase in the relative profitability of export sales vis-a-vis domestic sales, favourable exchange rate and increased market access.

The study revealed that tariff reduction has not always led to a surge in import growth. Even when imports grew significantly, it has not generally led to any contraction of domestic industries.

Impact of tariff cut on production, value-added investment and employment have been marginal. This is despite the fact that there have been overall productivity gains associated with lowering of tariffs. The effect of tariff would be more favourable (to the economy) if factor market rigidities are removed.

Noting that the government is committed to bring down tariff rates further to the levels prevailing in Asean, the study said that impact of tariff reforms would be more prominent after incorporating the expected efficiency gains.

Despite the reduction of tariff rates since 1991, Indias tariff rates remain among the highest in the world. There would be mounting pressure on India to reduce tariff during the World Trade Organisations (WTO) market access negotiations for non-agricultural products in Doha Development Round.

Share of GDP in internationally tradable manufactured products protected by non-tariff barriers declined from 90% in 1990 to 36% by 1995. By 2001, quantitative restrictions on imports had been removed on almost all manufactured products. Import-weighted average tariff for manufacturers, which stood at 100% in 1989-90, declined to 27% in 01-02.

The study states that on an overall basis, Indian industry will gain from tariff reduction. This would particularly hold if tariff reforms are associated with policies to do away with the rigidities in the factor.

The study revealed that at an aggregate level, tariff reduction would have only a marginal effect on output, invested capital and employment in the absence of efficiency gains. With efficiency gains, output will increase by about 3%; employment and capital invested will increase by about 1%. Imports will grow but exports will also grow, said the study. Exports will grow because of pro-competitive effect of tariff reduction. In addition, exchange rate depreciation and increased market access will also cause exports to grow.

Regarding use-based product categories, tariffs would favour intermediate and capital goods as compared to consumer goods, the study said. The percentage increase in exports would be more than the percentage increase in imports in the case of intermediate and capital goods. The percentage increase in imports would be more than the percentage increase in exports in the case of consumer goods. Some industries gain while others lose in terms of production, exports employment etc.

Based on a paper by Dr Bishwanath Goldar