In a break from the recent past, India’s average applied import tariff dropped to 15% in 2020 from as high as 17.6% in the previous year, recording the sharpest annual fall in about a decade and a half.
This reflects a partial reversal of duty hikes that had marked India’s sustained push for import substitution through self-reliance and its response to a spurt in trade protectionism in key economies – especially the US and China — in recent years. The tariff is still higher than the 2014 level of 13.5%.
Trade-weighted average tariff — total customs revenue as percentage of overall import value — also eased for a second straight year to 7% in 2019, the lowest since 2014 and compared with 10.3% in 2018, show the latest World Trade Organization (WTO) data.
However, as the government undertakes a comprehensive review of various customs duty exemptions this fiscal, in sync with a Budget announcement, this tariff fall may prove to be short-lived unless imposts on scores of products are trimmed as well.
While the applied tariff (simple average) on farm products eased to 34% in 2020 from 38.8% in the previous year, industrial tariff declined to 11.9% from 14.1%. Similarly, based on trade-weighted average, tariff on farm items dropped to 32.5% in 2019 from as high as 60.7% in the previous year, while industrial tariff dipped to 5.8% from 8%. These tariffs are meant for imports from countries to which India has accorded the most-favoured nation (MFN) status.
Last year, the government reduced customs duties on various products, including crude palm oil, precious metals like platinum and palladium, certain fuels, chemicals and plastics, select machinery and electronics items, sports goods and newsprint. Of course, the duties on certain products were raised as well.
India was branded “tariff king” by former US President Donald Trump, who had demanded that New Delhi slash duties on a broad range of products, even though the world’s largest economy turned more protectionist under him.
In response, Indian officials have pointed out that New Delhi’s applied tariffs are way below the permissible limit under the WTO framework, or the so-called bound rate (which was 50.8% in 2020). The trade-weighted average tariff is even lower than the simple average one (Washington highlights only the latter). Moreover, unlike other large economies, India hardly uses non-tariff barriers to crack down on imports it deems non-essential or sub-standard.
Following a surge in its crude oil import bill in 2018, New Delhi had targeted “non-essential imports” to curb pressure on its current account. It again resorted to increases in customs duties on scores of products in 2019 to prepare the way for its Aatmanirbhar initiative amid an escalating trade war between the US and China. These moves pushed up the applied tariff (simple average) sharply from 13.8% in 2017 to 17.1% in 2018 and 17.6% in 2019.
The proposed re-examination of the customs duty exemption is part of the broader effort to promote domestic manufacturing, which, in turn, is expected to curb imports and boost exports. A sustained drop in imports will also help the country lower its trade imbalance, which, some officials reckon, will not just ease pressure on its current account but boost its GDP growth as well.
Economists, however, have been critical of New Delhi’s move to undermine liberalisation, achieved assiduously over the years since the 1990s.
Former vice-chairman of Niti Aayog Arvind Panagariya has cautioned that the duty hikes can be counter-productive. No major economy has grown 8-10% without opening up its market and India needs to bring down its industrial tariff to at most 10%, he has argued.
In a paper with Shoumitro Chatterjee last year, former chief economic advisor Arvind Subramanian said India was turning inward. “Domestic demand is assuming primacy over export-orientation and trade restrictions are increasing, reversing a 3-decade trend,” the paper said. India still enjoys large export opportunities, especially in labour-intensive sectors such as clothing and footwear. “But exploiting these opportunities requires more openness and more global integration,” the paper argued. Analysts have also pointed out duty hikes have been mostly unsuccessful in containing imports, especially from China.
Domestic industry, meanwhile, clamours for more protection, arguing that in the absence of credible structural reforms to bring down its costs (including costs of logistics, wage, electricity and credit) and provide it a level-playing field, allowing increased foreign competition is patently unfair. Reforms to boost competitiveness of the economy haven’t been undertaken since liberalisation as they should have, it stresses. Bolstering competitiveness not just enables a country to improve its exports but also reduce costly imports.
As pointed out in a 2016 report by HSBC, India’s domestic bottlenecks explain 50% of the slowdown in overall exports (remaining the biggest threat to its outbound shipments), followed by world growth (33%) and the exchange rate (just 17%).