Fix Inverted Tariff Structures to Boost Industrial Growth in India

Newspaper Rainbow Series 28th January 2021 Save

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Context: While inverted tariff structures act as disincentives for global companies to set up their assembly units in India, they also put Indian manufacturers at a disadvantage vis-a-vis their foreign competitors.

Related terms

Inverted tariff structure: exists when the duty rate for the overall finished good is lower than the component parts, thereby rendering such a product’s final manufacture in the country uncompetitive.
Import openness: is defined as imports of goods plus services as a percentage of India’s Gross Domestic Product (GDP), steadily increased from 8.5% in 1991 to 30.6% in 2012.

India’s import tariff structure: an analysis

Background: The average import tariff rate was reduced from about 84% in 1990 to the lowest-ever level of 8.6% in 2010 and a gradual increase in import tariff rates since 2010.
Associated issues with increased import tariff:
- Dis-incentivises exports: as stated in Lerner Symmetry Theorem. For instance, exports of goods and services as a percentage of India’s GDP decreased from a peak of 25% in 2012 to 18.6% in 2019.
  - It was not due to global constraints as the ratio of world trade to GDP remained unchanged at 30% after 2012.
- Rise in unemployment: the total number of direct and indirect jobs tied to India’s exports increased from about 34 million in 1999-00 to 62.6 million in 2012-13(as per EXIM bank of India study) which declined to 58.1 million in 2017-18.
- Defeat the objectives of the ‘Make in India’ initiative: as high import tariffs may lead to a rise in costs for domestic manufacturers.
- Duty inversions: bars large-scale assembly activities in network products in India.
  - Increased tariff on network product industries (like electrical machinery, electronic equipment, telecommunications equipment, etc.) by the government in the last two budgets. E.g. the duty on display panels and touch assemblies used in mobile phones has increased from 0% to 10%.
  - World Trade Organization’s Information Technology (IT) Agreement: India has reduced its import tariffs on electronics and IT products while tariffs on intermediate inputs remain high.

Way forward:

Follow the Chinese model of export-led growth, with active participation in Global Value Chains (GVCs): suggested by Economic Survey of India 2019-20.
Exploit the potential of the ‘network products’: Of $5.6 trillion world export in 2018, India’s share was 0.5% ($27 billion) compared to China’s 17.5% ($981 billion).
Reduce customs duties: to provide easy access to imported inputs, particularly for intermediate inputs.
- Will attract global companies to choose India as their preferred location for final assembly.