The rupee-US dollar exchange rate has touched 48.67 per cent at present as against the 43.5 per cent during January 2000, resulting in an increase in the level of protection to the domestic industry competing with imported products. During this period, Mr Sinha, it can be noted, has abstained from effecting any major general reduction in customs duty rates. The peak rate of 40 per cent was reduced to 35 per cent in the 2000-01 Budget, and the 10 per cent surcharge was removed in the 2001-02 Budget.
Sources said depreciation in the value of rupee was providing a leeway to the finance minister for maintaining the protection level to the industry at the last years level (rupee-US dollar exchange rate in January 2001 was at around 46.3 per cent) even after effecting a cut in customs duties. Though it would be difficult for the finance minister to base customs duty reduction on the exchange rate, Mr Sinha could use the depreciation in the rate to justify the duty cuts in the Budget, they pointed out. It may be noted that the protection available to the domestic industry is a combination of the exchange rate of the rupee and the weighted average tariff based on the overall import value of goods, including the exempted items.
At any point of time, as explained by the inter-ministerial group on the customs duty structure, different combinations of average customs tariff and the exchange rate can provide the same level of protection to the industry. Which means that in the current scenario, the depreciation of the rupee has raised the protection level, providing the scope for a simultaneous cut in the average tariff so as to bring the available protection, at least to the earlier levels.
The group in its report has shown how during 1999-00, when the weighted average tariff was at 29.5 per cent and the exchange rate was at 43.33, the different combinations of average tariff and exchange rate could have given the same protection. The panel has found that combination of 44.89 per cent exchange rate and 25 per cent average tariff, 46.67 per cent exchange rate and 20 per cent average tariff, and 48.88 per cent exchange rate and 15 per cent average tariff would have meant the same level of protection, as was actually available in 1999-2000.
It has further argued that for any level of protection, the combinations with high customs duty rates, reduce the competitiveness of the industry. These combinations, according to the report, are inefficient as they bias the overall economic system against exports. This is because, a depreciated exchange rate (at the prevailing domestic prices) gives equal incentive to export and import substitution, while a higher tariff gives more incentive for import substitution vis-a-vis exports.