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The Hardening Trade Stance

The hardening trade stance

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India started hiking tariffs well before the post–pandemic mood of protectionism in the West kicked in. Even as it negotiates several bilateral trade deals, India has chosen to stay out of key regional trading arrangements.

IN 1981, a committee headed by V Rajaraman of the Indian Institute of Science (IISc) pro- posed concessions for the import of computers against software exports-effectively reversing the stated policy to impose physical controls on imports to protect the state-owned Electronics Corporation of India Ltd. The Hardening Trade Stance

The Prof Rajaraman Committee report set the stage for the import of computers and their parts, the subsequent computerization of the Indian Railways passenger reservation system, and the progressive entry of computers into India’s financial sector-eventually catalyzing the IT revolution. The Centre’s August 3 move to “restrict the imports of personal computers and laptops, and to allow their imports only against a license, marks a reversal of the policy followed since the Rajaraman Committee.

While the Ministries of Electronics & IT and Commerce, which were involved in pushing the measure, were forced to backpedal a day later- amid a barrage of criticism – and ex- tend the date of implementation of the order by three months, the move marks a regression in the country’s outlook on trade liberalization. The Hardening Trade Stance

The last time the government used licensing as a trade tool was in July 2020, when the Commerce Ministry restricted 10 categories of TVs, the imports of which needed a license from the Directorate General of Foreign Trade (DGFT) Overall, the licensing tool has been used sparingly.

The Hardening Trade Stance
The Hardening Trade Stance

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Govt justification

Multiple justifications for the move have been offered, including national security concerns. But the more plausible reason could be that the Centre’s revised production-linked incentive (PLI) scheme for IT hardware has failed to find much traction. Even so, the use of licensing as a weapon stands out, given that the tariff barrier option, being increasingly weaponized by the government, was not used. Industry players said they were not aware of any consultations before the decision. The order, issued “with immediate effect” Thursday, triggered panic, with consignments facing the prospect of being stuck at ports and warehouses. The use of licensing stoked further concern given the potential for arbitrary action. The Hardening Trade Stance

Higher trade barriers

Tariff hikes have come multiple times covering well over 500 item categories since 2016(see box), marking a “calibrated departure” from the policy of reducing import duty. Prior to the hikes, India’s peak customs duty- the highest of the normal tariff rates – on non-agriculture products had come down from 150% in 1991-92 to 40% in 1997- 98, to 20% in 2004-05, to 10% in 2007-08.

India’s Trade Policy Review at the World Trade Organisation (WTO) in 2021 made a clear note of this trend. “The simple average applied MFN (most favored nation) tariff in- creased from 13% in 2014/15 to 14.3% in 2020- 21(15.4% if ad valorem equivalents are considered). The increase in the average tariff reflects the changes in the distribution of tariff rates since the last (WTO) Review in 2015, with a decrease in the percentage of lower-rate tariffs.” The Hardening Trade Stance

As a consequence, the latest Review noted, while tariff rates continue to range from zero to 150% (considering only the ad valorem rates), the percentage of tariff lines with rates between 0% and 10% declined from 79.1% in 2015 to 67.8% in 2020-21. However, the percentage of tariff lines that bear rates higher than 10% and up to 30% increased from 12.1% (in 2014-15) to 21.3% (2019-20) to 22.1% in 2020-21, and those with rates above 30% rose- from 2.8% (2014-15) to 4% in 2020-21.

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Pitfalls of import aversion

The Ministry of Commerce denies that these duty increases are “protectionist” in nature. An official said that India’s stance on hiking tariffs mirrored the broader trend globally and that New Delhi had shown a renewed interest in signing bilateral Free Trade Agreements (FTAs) over the last 24 months.

While both statements have an element of truth, India’s tariff hike spree started well before the largely post-pandemic mood of protectionism in the West kicked in. Also, while India is negotiating a record number of bilateral trade deals, it has chosen to stay out of important mega-regional trading arrangements, including the Regional Comprehensive Economic Partnership (RCEP). The Hardening Trade Stance

Analysts caution that in some cases where customs duty hikes have been proposed, duties are close to or have effectively crossed the WTO-mandated “bound rates”. These are the customs duty rates that a country commits to all other members under the MFN principle, and breaching these rates could effectively put a country at risk of be- ing branded as “protectionist” as per WTO norms that prohibit discrimination by use of tariffs by its 164 members. The Hardening Trade Stance

In an interaction with The Indian Express, economist Dr. Arvind Panagariya said in response to a question on India’s trade stance: “We’ll do ourselves a really big favor if we lowered our own tariff barriers. If anything, in re- cent years, we have done the opposite. If our tariffs are lower, it will be better because this reduces the prospects of trade diversion. This means switching from a less-costly source to a more-costly source. This is the classic kind of trade diversion problem that economists worry about,” Panagariya said. “Lower tariffs of our own means we are open to imports. But to import more, we got to export because you got to pay for what you buy in foreign exchange. You can’t count on running a larger current account deficit to pay for imports.” The Hardening Trade Stance                

Incidentally, the hike in import duties renders India’s exports uncompetitive too, given that a significant portion of exports are im- port-intensive. Also, trade barriers end up promoting the inefficiencies of domestic manufacturing, at the cost of hurting consumers. The Hardening Trade Stance

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Steps despite opposition

Some tariff hikes over the last two years have come despite protests from the industry and even within sections of the government. The Hardening Trade Stance

  • In February 2020, Indian toy traders, retailers, wholesalers, and manufacturers came together to form an umbrella body, the All India Toys Federation, to protest the hike of import duty on toys in that year’s budget.
  • The withdrawal of concessional customs duties on 76 specified drugs in January 2016 had to be partly withdrawn after the Ministry of Health cited an adverse impact on the prices and availability of these drugs. The concession of customs duties on three drugs- Octreotide, Somatropin, and Antihemophilic factor concentrate VIII & IX- were subsequently restored through another notification on February 17, 2016. The Hardening Trade Stance
  • The implementation of the duty hike on solar panels from September 2017 was opposed by the New and Renewable Energy Ministry and solar project developers.
  • The withdrawal of the exemption from basic customs duty on cashew nuts in shell in Budget 2016-17 resulted in representations from trade and industry bodies seeking a withdrawal of the imposition of the duty of 5%

The shift in stance

 The decisive shift in the policies on customs duties started in the middle of 2017. At a Niti Aayog Pre-Budget meeting on December 28, 2016, a proposal to further harmonies the peak customs duty at 7% was dis- cussed, with the aim of both bringing the im- port tariffs in line with ASEAN duties and addressing the issue of “duty inversion”: The Hardening Trade Stance

when the tariffs on finished goods are lower than that on components and raw materials -that hurt domestic manufacturing. But alongside addressing the duty inversion, tariffs started going up from that time onward. The Hardening Trade Stance

Analysts predict that breaching the WTO- bound rates could have repercussions, J Officials point out that alongside hiking duties, India has reduced import duties on some items, and that this aspect does not get highlighted in debates on India’s trade stance. The official argument is that these calibrated changes in duty rates “will help the domestic industry in capacity creation”, “providing a level playing field”, “easing the raw material supply side constraints” and “enhancing the ease of doing business”.

But analysts who counter this view say that the nearly eight years of protectionism have not pushed up the share of manufacturing in India’s GDP-levels of around 14% have been steady for well over a decade, despite multiple sops, including unprecedented tax breaks. The Hardening Trade Stance

And the PLI, with the exception of promoting a higher degree of assembly in sectors such as cellphones and to some extent refrigerators, has not found favor with industry. This could only get accentuated as competitors such as Vietnam and Indonesia get more integrated into global value chains, even as India chooses to stay out. LONGER VERSION The Hardening Trade Stance

Content Written By Prashant Singh Sir WDA