After several years of steady and progressive trade liberalisation, India seems sliding into a protectionist groove, again. Several rounds of duty hikes since the Modi 1.0 government assumed office in 2014 have significantly increased import barriers; besides, the planned stringency on checking sub-standard imports could keep a section of imports at bay.
India’s applied (real) tariff has increased to an average of 17.6% in 2019 from 13.5% in 2014, according to the latest data compiled by the WTO. Trade-weighted average tariff, too, rose from 7% to 10.3% between 2014 and 2018, the latest year for which the data are compiled.
As the government undertakes a major review of its tariff policy to push for Atmanirbhar Bharat and target low-grade imports from China, the average tariff level may rise even further.
This may cause unease among some trading partners, including the US, who tend to exaggerate New Delhi’s “trade protectionism” by citing the (high) simple average applied duty, disregarding the relatively low bound rates (upper level allowed by the WTO) maintained by the country.
Of course, India’s trade-weighted average tariff of 10.3% in 2018 was well below a third of the level permitted by the WTO.
What underlines the need for a rethink on the policy is the fact that hiking the duties in the recent past has had only limited efficacy in reducing the target imports. Also, there is evidence of import curbs impeding domestic value-addition and economic growth.
After its increase of customs duties on a range of products in September 2018, an FE analysis had suggested that barring certain gems and jewellery items, where imports were already falling before the duties were hiked, as many as eight of the 13 product segments witnessed a rise, year on year, in purchases from overseas between October 2018 and February 2019.
Of course, a resource-hungry government mops up some extra revenue by way of higher customs duty collection at a time when the GST mop-up has remained below expectations. But that represents a myopic view as import curbs could ultimately stifle economic expansion and thereby hit revenue growth. These restrictions could work against Indian industry’s efforts to be more globally competitive.
The argument that import curbs could reduce India’s merchandise trade deficit and thereby the overall shortfall on the current account also doesn’t hold water, as higher imports could ultimately push exports if these are accompanied by domestic policies to spur local manufacturing.
Since September 2018, the government has raised import duties on scores of products in October 2018 and then in the Budgets for FY20 and FY21. The duties on dozens of items, ranging from gold, certain electronics and electrical items to select steel products, footwear, furniture and toys.
Also, despite a duty hike last year, imports of products like base metal mounting, fitting or similar items meant for furniture, etc, fell by only 3.7% y-o-y in FY20, when overall merchandise imports were down by as much as 7.8%. Similarly, a higher duty didn’t deter imports of static converter and its purchases barely fell (by 2%) in the last fiscal to $1,083 million. Of course, in certain other steel products, the duty increase seems to have worked.
So, for the Atmanirbhar India scheme to work, the government must remove obstacles in manufacturing, the share of which in GDP has remained stagnant at about 15-17% for decades now, according to Biswajit Dhar, professor at the Centre for Economic Studies and Planning of JNU.
On a crackdown on imports from China, Dhar said: “We have to recognise that China has a huge presence in the supply chain involving India and any move to disrupt that will hurt the Indian economy and consumers. So we must try and prepare our industry for a long haul by building a solid (manufacturing) eco-system and gradually reducing our dependence on imports from China.”
Also, as pointed out in a 2016 report by HSBC, India’s domestic bottlenecks explain 50% of the recent slowdown in overall exports (remaining the biggest threat to its outbound shipments), followed by world growth (33%) and the exchange rate (just 17%). So without structural reforms, especially in factors of production like land, labour and capital, a sustaintained improvement in exports is unthinkable. For his part, Prime Minister Narendra Modi has spoken about heralding fresh reforms in the factors market and the government is expected to spell out its intent soon.
Importantly, the Surjit Bhalla panel last year suggested that every free trade agreement must be conceived with a view to achieve national objectives and should not be driven by narrow considerations or political expediency. “While negotiating market access for goods in FTAs, India should focus on both tariffs and non-tariff barriers in the partner countries. In services, India should go beyond Mode 4 (movement of persons), and also focus on Mode 3 (commercial presence), as Indian investors have an interest in investing in the FTA partner country,” the report said.
Countries like China, Japan and South Korea have effectively employed various non-tariff measures to curb imports that they deem undesirable, while keeping tariff barriers at a more reasonable levels to mask the ferocity of their trade protectionism. India has already taken a leaf out of China’s book and is developing standards to curb low-grade imports.
According to an analysis of the commerce ministry ahead of India’s RCEP pullout in November 2019, China has put in place 1,516 notifications that are nothing but technical barriers to trade (TBT), followed by South Korea (1,036) and Japan (917), while India has initiated only 172 such steps. India’s average applied tariff, however, stood at 17.1%, while China’s was 9.8%, South Korea’s 13.7% and Japan’s 4.4%.