This is an archive article published on February 28, 2024

Opinion Express View on India’s tariff regime: Costs of a barrier

Erecting high tariff walls allows inefficient players to survive, hurts consumers. Government must review industrial and trade policy

India’s tariff regime, low tariff structure, average tariff decline, tariff increases, Arvind Subramanian, atmanirbharta, self-reliance, Indias trade basket, Indias tariffs, China plus one strategy, indian express news

According to a report in this paper, sections within the government have begun raising these issues, favouring a more nuanced approach.

By: Editorial

February 28, 2024 06:45 AM IST First published on: Feb 28, 2024 at 06:45 AM IST

Since the early 1990s, India had been steadily moving towards a low tariff structure. The average tariff declined from 125 per cent in 1990-91 to 13 per cent in 2014-15, according to a study. However, since 2014 there have been around 3,200 tariff increases, with the largest increases occurring in 2018, according to a paper by economist Shoumitro Chatterjee and the former chief economic adviser to the government of India, Arvind Subramanian. These large tariff increases, which can be traced to the government’s call for atmanirbharta or self-reliance, have meant that the average tariff rate has risen to around 18 per cent, affecting a sizeable segment of the country’s trade basket. India’s tariffs are amongst the highest in the world.

In fact, they are not only higher than those of China (7.5 per cent), but also countries like Vietnam (9.6 per cent) and Bangladesh (14.1 per cent) — India’s competitors in the China plus one strategy. High tariffs place manufacturers at a disadvantage, affect export competitiveness and hurt consumers.

Alongside this growing protectionism, the targeting of Chinese imports post the Galwan clash is also now being seen as impacting domestic output or loss of competitive advantage in sectors such as electronics and pharmaceuticals — China accounts for a sizeable share of India’s imports, especially inputs in key sectors and capital goods. According to a report in this paper, sections within the government have begun raising these issues, favouring a more nuanced approach. This should spur conversations in the government on its approach towards promoting manufacturing and facilitating exports.

Reportedly, the Ministry of Electronics and Information Technology had also earlier this year pressed for reducing duties on parts including circuit boards, chargers and fully assembled phones. Groups representing cell phone manufacturers had said that the country’s high tariff structure is a disincentive to de-risking supply chains beyond China. Seeking to be attractive alternatives for mobile manufacturers, countries like Vietnam, Thailand and Mexico are lowering tariffs on phone components. There are some indications of a rethink on the issue — a day before Union Budget 2024-25, the government announced a reduction in the import duty for components used in the manufacturing of mobile phones from 15 per cent to 10 per cent. This is the right approach. Erecting high tariff walls allows inefficient domestic players to survive, and hurts consumers.

Alongside, the government must press ahead with signing trade agreements. After initially showing some hesitation, it has signed a comprehensive economic partnership agreement with the UAE and an economic cooperation and trade agreement with Australia. It is currently negotiating agreements with other countries such as the UK. It must pursue similar pacts, including with the European Union.