There is a need as well as a possibility for tariff policy reform in India to simplify and bring transparency in the tariff regime. This piece originally appeared in Business Standard.
India is widely known as a country with high import tariffs. This view, however, is incorrect. Changing this view is important for several reasons, both within India and outside. But first, the facts.
World Trade Organization estimates of India’s applied most favoured nation (MFN) tariffs, i.e. tariffs applicable in general, are 13.4% (simple average) and 7% (trade-weighted average). The World Bank reports that India’s 2012 applied average tariffs were 6.3%, significantly higher than those for low tariff economies. The corresponding estimates are 1.8% for both Australia and Chile, and 1.6% for the United States. This apparent difference between these countries and India, however, is erroneous.
A simple way to calculate India’s trade-weighted applied tariffs is to consider the percentage ratio of customs revenue to imports. The usual estimates using this method for India have ranged between 6.3% and 8.4% for the past three years, close to the applied or trade-weighted average tariffs calculated by the World Bank and the WTO. However, the actual estimate of applied tariff is provided not by total customs revenue, which for India includes a refundable component imposed on imports in lieu of the domestic excise tax. The correct basis is the “total basic customs revenue” which shows revenues from tariffs without any other extraneous revenue item added to it. Estimates using basic customs revenue show that the applied average tariff of India in the last three years ranged between 1.7% and 2.3%, similar to the average tariff estimates for economies considered relatively open in terms of tariffs. Thus, India too is a low tariff economy.
The large difference between India’s actual average tariffs and its MFN trade-weighted applied average tariffs arises inter alia due to the several exemptions and concessions that the country provides on its MFN tariffs. Despite these concessions, people in general continue to think of India as a high tariff economy. This suggests a need as well as a possibility for tariff policy reform to simplify and bring transparency in the tariff regime, and enable users to more easily understand the actual tariff paid. These changes would help investors and others at home and abroad, including investment initiatives under programmes such as “Make In India”.
[There is] a need as well as a possibility for tariff policy reform to simplify and bring transparency in the tariff regime, and enable users to more easily understand the actual tariff paid.
An important point we still need to address is that since higher tariffs discourage imports, the trade-weighted average is inherently downward biased. It is argued that if the prevailing high tariffs are reduced, then the increase in imports would raise the average trade-weighted tariff. Let us examine this aspect for India. For that, we first separately consider agriculture and non-agriculture products. Trade policy for agriculture is always treated differently across most countries. For example, even for the United States, the 10 agriculture categories according to the WTO have maximum tariffs ranging between 18% and 350%. Maximum tariffs for four of these categories are above 130%, and between 44% and 55% for most others. The situation with non-agriculture tariffs is different, and even in trade negotiations, greater focus on market opening is given to non-agriculture products.
For non-agriculture products, most tariff lines for India are between zero and 10 per cent. Tariff lines with tariffs above 10% have a total import share of less than 4.6%. Most of these high tariff categories have import shares less than 0.1% (details are in a forthcoming paper by this author in a book edited by Rakesh Mohan). Simple calculations suggest that even if the reduction of these high tariff levels will lead to increased imports, the rise in India’s trade-weighted average tariff is likely to be very small. Of course, the high tariffs on agriculture is another matter, but as we mention above, this area is treated differently in trade policy and negotiations. Moreover, the above-mentioned low average tariffs of 1.7% to 2.3% include all products, agriculture and non-agriculture.
A perception of India as a low tariff economy would prepare a basis for domestic tariff policy reform (with changes implemented over a transition period), and help change the perspective of Indian trade negotiators in their interaction with other nations. This could also provide them a better basis to develop negotiating strategies for seeking greater market access for Indian exports to markets abroad. Moreover, policy makers will have more flexibility than erstwhile considered feasible to evolve a revised tariff policy.
Further, if tariff policy has to be combined with new industrial policy, as is now a tendency in various economies, it is better to do so with transparent tariffs that fit into a consistent policy outlook. In this context, it is noteworthy that for non-agriculture products, India has 15 different MFN tariffs. Contrast this with the suggestion by the Chelliah Committee Report of 1993, which provided major inputs into the tariff policy reform of India. The Committee noted that having a large number of tariff rates creates administrative problems, leads to non-transparency in the degrees of effective protection to different products, and distorts allocation of resources. The Committee suggested that with a limited number of tariff rates, we make “administration of the tariff a fairly easy task, and by limiting the spread, we shall minimise distortions”. It recommended that latest by 1998 end-March, “the structure of ad valorem rates of duties in place should be: 5, 10, 15, 20, 25 and 30. In addition, when non-essential consumer goods are allowed to be imported, there should be another “slot” for them, namely, 50 per cent.” This message is worth consideration in the present situation as well.
These various initiatives would be facilitated with the knowledge that India is a low average tariff economy, thus leading to tariff policy reform, easier conditions for investment decision-making, and a stronger basis for negotiating with others to enhance the available opportunities for India.