Opinion Inverted Tariffs and Other Inversions
You must be as bored as I am of the souped up hype in the budget week.
All the faces were there again and with the same message. Business men and journos a few days ago being lampooned for other exposures were dutifully praising the wisdom of the budget in the same language as always. Bank managers were not to be left behind. The opposition on the other hand was using the same language as earlier to criticize. On page eleven in the lower half of the last column,some besotted independent economists,CAs and tax consultant types were saying ahem,this is good,this not so and so on.
The Pulitzer however goes to the channels and newspapers,alas not the one in which I write,who brought out the two minute budget,just before the android gets you on way to the office or for the lady who wants to keep up,while making sure that the other kitties dont find out that the balsamic sauteing the mushrooms is rancid. A companion to this was a Box with the budget words you dont know made easy. I kept this as a sort of Sudoku and went through the FMs speech to see if they had missed something. Tough luck to me,these kids are smart,they had it all there,in the box. I spoke too soon. In the last section of his speech,just before the para on the Environment,when in the Lok Sabha,even the unusually quiet members were getting restive,he plumps in the words DUTY INVERSIONS. I bet you dont know what that is,unless you are one of the faithful. Also no BOX carried what that means. But you dear reader,if you are still there have in Charawak an experienced economist at your service who will explain this,whether you want the explanation or not.
In India the words inverted tariffs go back to the days of early reform. The late Rajiv Gandhi started that reform and somewhat wisely said lets do it first at home and the global reform will come after we have cooled the hot house of no competition at home. So As Chairman BICP I laid out the path of decontrolling prices and capacities in many industries like cement,steel,aluminium and so on. Raja Chelleah was to document that by 1989 around two thirds of organized Indian industry was decontrolled and subject to impersonal tax and tariff guidance rather than physical controls at the level of the individual firm which causes corruption as we saw last month. For uniform products in continuous process industries like cement and so on,it was relatively easy. But the tough ones were industries like machinery,machine tools and so on. Here India had great strengths built through time. But if you are making a lathe efficiently but the fellow who supplies you special steels or an electronic control is inefficient you will make a loss as compared to a less efficient producer abroad. We called it negative protection.
The answer we said was to create an architecture of reform in which there was harmonization and phasing. Machine tools,special steels and electronic controls in this case were to be reformed together. We said machine tools taken out of import controls were to get ninety percent protection and special steels and so on would get sixty percent so in effect they got thirty percent and so it went on. This is called inverted tariffs and will of course become redundant if there is overall reform. In the literature on strategic policy making it was hailed as a great innovation. In 1992 there was a general reform but the machine tool wallahs complained and in 1995 the then FM,Dr. Singh brought in inverted tariffs again at sixty and forty percent. The level was lower but the effective protection the same. The recent time was the stimulus packages. In these the rich countries kept on giving lectures on free trade but when their industries were hurt they imposed protection. The Central Board of Indirect Taxes in 2008 again talks of inverted tariffs to be phased out when the stimulus is over. A Mexican friend brought this to my attention when I was holding forth on trade friendly regimes in India in a OECD meeting. The FM again talks of this reform in this budget. Everything changes. Nothing does.
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