The Ineffectiveness of Raising Tariffs

Context:  While the results of February 2018, tariff increases have been mixed, but the govt continues to be committed to such protectionism.

Background: 

On February 1, 2018, the Union Budget raised Customs duty on as many as 46 items in a bid to “provide adequate protection to the domestic industry”.

In July 2019 and again in February 2020, import duties were raised on 37 and 16 more items, respectively, in order to “provide a level playing field to domestic producers” and to promote Make in India.

Reasons for Increasing Import Tariff/Custom Duty

• Boosting domestic production and incentivising domestic value addition 
• Keeping a check on high imports bill: While the total imports (of the 46 items) were at $84 Billion in 2015-16, it had spiked to $112 billion in 2017-18.
• India’s total imports in 2017-18 rose by 21% to $465 billion.
• This increase was also facilitated by an appreciation of the Indian rupee against the US dollar. 
• The rupee’s average exchange rate for the US dollar in 2017- 18 appreciated by about 4% to Rs64, compared to Rs67 a year ago.

Arguments against raising tariff 

• Non-reliance on the market-driven exchange rate mechanism: Rising of imports due to currency appreciation should be delt in the market and not by raising tariffs.
• Government Bias: By picking up a select number of items (46), the Government has restricted the protection to select group of winners, rendering the others as losers.

• Strengthening politics of nurturing domestic corporate and trade lobbies.

• More than adequate protection: In 2 years after the Custom duty hike in 2018, the rupee has depreciated sharply by 10%, the promised protection now becomes more than adequate.
• No Impact on imports even after the hike: 
• Imports of footwear, watches and clocks, food processing items (mainly fruit juice) and perfumes & toiletry preparations have increased in the last two years 

• Unclear outcomes in domestic promotion: It is unclear whether the said tariffs led to the resurgence of domestic manufacturing markets or just added cost to the domestic consumers. 

Conclusion: Flawed policy of raising tariffs will make Indian manufacturing even more uncompetitive in terms of costs and efficiency