In 1981, a landmark report by a committee headed by Prof V Rajaraman of the Indian Institute of Science (IISc) proposed concessions for the import of computers against software exports. The recommendation was to effectively reverse what was until then the stated policy of the Government of India — to impose physical controls on these imports with the sole objective of protecting the turf of the state-owned Electronics Corporation of India Ltd.
The Rajaraman Committee report set the stage for the import of computers and their parts, the subsequent computerisation of the Indian Railways passenger reservation system, and the progressive entry of computers into India’s financial sector, eventually catalysing India’s IT revolution.
The Centre’s sudden move on August 3 to “restrict” the imports of personal computers, laptops, palmtops etc., and to allow their imports only against a valid licence for restricted imports, marks the reversal of the broadly consistent policy adhered followed by successive governments since the Rajaraman Committee.
While the Ministry of Electronics and IT and the Ministry of Commerce — the two nodal ministries involved in pushing the measure — were forced to backpedal a day later amid a barrage of criticism and extend the dates by three months, the move marks a regression in the country’s outlook on trade liberalisation.
The last time the government used licensing as a trade tool was in July 2020, when the Commerce Ministry restricted 10 categories of TVs, the imports of which needed a licence from the Directorate General of Foreign Trade. But the licensing tool has been sparingly used so far.
Government’s justification
Multiple justifications for the move have been offered, including hints about national security concerns, but the more plausible reason could be that the Centre’s revised production linked incentive (PLI) scheme for IT hardware was failing to find traction.
Even so, the use of licensing as a weapon stands out, given that the tariff barrier option, which is being increasingly weaponised by the government, was not used.
Industry players said they were not aware of any consultations before the decision — and the order, issued “with immediate effect” on Thursday morning, triggered panic, with consignments facing the prospect of being stuck at ports and warehouses. The use of licensing stoked further concern given the potential for arbitrary action.
Progressively higher trade barriers
The steady surge in instances of hikes in customs duties is clearly evident: tariff hikes have been undertaken multiple times covering well over 500 major item categories since 2016, marking a “calibrated departure” from the underlying policy of reducing import duty that was consistently followed by successive governments over the last two decades.
Prior to the large-scale hikes, India’s peak customs duty — the highest of the normal tariff rates — on non-agriculture products had been coming down steeply from 150% in 1991-92 to 40% in 1997-98, to 20% in 2004-05, and to 10% in 2007-08.
This has seen a progressive reversal since 2016. India’s Trade Policy Review at the World Trade Organisation (WTO) in 2021 made a clear note of this trend.
Chart showing major instances of custom duty hikes since 2016.
“The simple average applied MFN (most favoured nation) tariff increased from 13% in 2014/15 to 14.3% in 2020-21 (15.4% if ad valorem equivalents are considered). The increase in the average tariff reflects the changes in the distribution of tariff rates since the last (WTO) Review in 2015, with a decrease in the percentage of lower-rate tariffs.”
As a consequence, the latest Review noted, while tariff rates continue to range from zero to 150% (considering only the ad valorem rates), the percentage of tariff lines with rates between 0% and 10% declined from 79.1% in 2015 to 67.8% in 2020-21. However, the percentage of tariff lines that bear rates higher than 10% and up to 30% increased from 12.1% (in 2014-15) to 21.3% (2019-20) to 22.1% in 2020-21, and those with rates above 30% rose from 2.8% (2014-15) to 4% in 2020-21.
The pitfalls of import aversion
The Ministry of Commerce has consistently denied that these duty increases are “protectionist” in nature. An official said that India’s stance on hiking tariffs mirrored the broader trend globally and that New Delhi had shown a renewed interest in signing bilateral Free Trade Agreements (FTAs) over the last 24 months.
While both statements have an element of truth, India’s tariff hike spree clearly started well before the largely post-pandemic mood of protectionism in the Western world kicked in. Also, while India is currently negotiating a record number of bilateral trade deals, it has chosen to stay out of important mega-regional trading arrangements, including the Regional Comprehensive Economic Partnership (RCEP).
Analysts caution that in some cases where customs duty hikes have been proposed, duties are close to or have effectively crossed the WTO-mandated “bound rates”. These are the customs duty rates that a country commits to all other members under the MFN principle, and breaching these rates could effectively put a country at risk of being branded as “protectionist” as per WTO norms that prohibit discrimination by the use of tariffs by its 164 members.
In a recent interaction with The Indian Express, economist Dr Arvind Panagariya said in response to a question on India’s trade stance: “First of all, we’ll do ourselves a really big favour if we lowered our own tariff barriers. If anything, in recent years, we have done the opposite. If our own tariffs are lower, it will be better because this reduces the prospects of trade diversion. This means switching from a less-costly source to a more-costly source.
“This is the classic kind of trade diversion problem that economists worry about,” Panagariya said. “Lower tariffs of our own means that we are open to imports. But to import more, we got to export because you got to pay for what you buy in foreign exchange. You can’t count on running a larger current account deficit to pay for those imports.”
Incidentally, the hike in import duties does render India’s exports uncompetitive too, given that a significant portion of exports are import-intensive. More importantly, trade barriers end up promoting the inefficiencies of domestic manufacturing, at the cost of hurting consumers.
Opposition to the trade stance
Some of the tariff hikes initiated over the last two years, incidentally, have come despite protests from the industry and even within sections of the government itself.
For instance, in February 2020, Indian toy traders, retailers, wholesalers, and manufacturers came together to form an umbrella body, the All India Toys Federation, to protest the hike of import duty on toys in that year’s budget.
The withdrawal of concessional customs duties on 76 specified drugs in January 2016 had to be partly withdrawn as the Ministry of Health and Family Welfare cited an adverse impact of the move on the prices and availability of these drugs. The concession of customs duties on three drugs — Octreotide, Somatropin, and Anti-Haemophilic factor concentrate VIII & IX — were subsequently restored through another notification on February 17, 2016.
The implementation of the duty hike on solar panels from September 2017 was opposed by both the New and Renewable Energy Ministry and solar project developers.
The withdrawal of the exemption from basic customs duty on cashew nuts in shell in Budget 2016-17 resulted in representations from various trade and industry associations such as the Andhra Pradesh Cashew Manufacturers Association, the Karnataka Cashew Manufacturers Association, Kerala Cashew Processors and Exporters Association, the Cashew Factory Owners Development Association of Tamil Nadu and the Cashew Export Council of India. They sought a withdrawal of the imposition of the duty of 5% on cashew nuts in shell.
How the shift in stance progressed
The decisive shift in the policies on customs duties started from the middle of 2017. At a Niti Aayog pre-Budget meeting on December 28, 2016, a proposal to further harmonise the peak customs duty at 7% was discussed, with the aim of both bringing the import tariffs in line with ASEAN duties and addressing the issue of “duty inversion” — when the tariffs on finished goods are lower than that on components and raw materials — that hurts domestic manufacturing. But alongside addressing the duty inversion, tariffs started going up from that time onward.
Government officials that The Indian Express spoke to conceded that there was a shift in the tariff responses subsequent to this meeting, but said this was “in line with new global realities”.
Analysts predict that breaching the WTO-bound rates could have repercussions, since the multilateral body requires member countries to notify bound tariffs on products as per the commitments resulting from negotiations. Country-wise bound tariff commitments are listed in the documents called the Schedule of Commitments and are an integral part of the WTO Agreement.
WTO member countries have the flexibility to increase or decrease their tariffs so long as they do not raise them above their bound levels. If one WTO member raises applied tariffs above their bound level, other WTO members can take the country to the WTO’s dispute settlement for resolving the issue.
Officials also pointed out that alongside hiking duties, India has reduced import duties on some items, and that this aspect does not get highlighted in debates on India’s trade stance. These include import duties on essentials such as palm oil, in September 2016. The import duty on wheat was reduced later that year, before being hiked again.
The official argument is that these calibrated changes in duty rates “will help the domestic industry in capacity creation”, “providing a level playing field”, “easing the raw material supply side constraints” and “enhancing ease of doing business”, and that representations from industry have been taken into consideration while making changes in duty rates. The instances of increased domestic manufacturing of refrigerators in India and increased levels of assembly and manufacture of cellular phones have been cited by government officials.
But analysts who counter this view say that the nearly eight years of protectionism have not pushed up the share of manufacturing in India’s GDP — levels of around 14% have been steady for well over a decade, despite multiple sops that include unprecedented tax breaks.
And the PLI, with the exception of promoting a higher degree of assembly in sectors such as cellphones and to some extent refrigerators, have not found favour with industry. This could only get accentuated as competitors such as Vietnam and Indonesia get more integrated into global value chains, even as India chooses to stay out.
The Centre’s sudden move on August 3 to “restrict” the imports of personal computers, laptops, palmtops etc., and to allow their imports only against a valid licence for restricted imports, marks the reversal of the broadly consistent policy adhered followed by successive governments since the Rajaraman Committee. (Image via Markus Spiske/Pixabay) 
Chart showing major instances of custom duty hikes since 2016.
Share
