You do the math

With the budget just weeks away, India Inc has heightened its campaign against a further cut in import duties. Indian industry, the familiar FICCI-CII argument goes, has to spend 5 per cent more (or maybe it’s seven) of its earnings in paying for higher electricity charges as compared to its counterparts in the US or Europe. Another 3-4 per cent more because of the higher interest costs; around 8-9 per cent more since local units have to pay various cesses that are non-modvattable and are not levied on imports...

Put them all together, and you get the ‘disadvantage’ Indian producers face — in the case of capital goods, CII calculates it’s between 18-27 per cent. For other goods, if I remember correctly, the figure’s roughly in the 20 per cent range. With India’s average import duty collection rate around 21 per cent, this would mean local industry is just about surviving on the margin — lower the import duties any further, the argument goes, and even the two per cent industrial growth we’re having right now will disappear.

So what’s poor Yashwant Sinha supposed to do — should he lower import duties and face the combined wrath of FICCI-CII or not? For one, the figures themselves seem to be a bit excessive — if this was indeed the case, that Indian industry had virtually no protection, the country would have been swamped with imports — yet, imports of items of bulk consumption fell over 4 per cent in 1999-00 and by over 40 per cent in 2000-01; capital goods imports fell 11 per cent in 1999-00 and another 2 per cent in 2000-01; non-oil imports that grew only 3 per cent in 1999-00, fell by under-9 per cent in 2000-01.

Besides, it may be worth keeping in mind the fact that (as pointed out by Dr Arvind Virmani’s Working Group on Customs Tariffs), India is among the world’s most-protected nations, in terms of the tariff walls afforded to the domestic market that is. Data for 70 countries from the World Development Indicators Database in 1999 shows that India’s import tariffs were the third highest in the world — only Pakistan and Cameroon had higher tariffs. Or look at a larger data-set of 114 countries, and you find that India is ranked 103rd in terms of the import tariffs it has — among the 11 countries which have higher duties than India are Malawi, Myanmar and Syria.

Just by way of comparison, while India has a 21 per cent average import tariff (that’s the absolute value of tariff collected divided by the total import value), that of China is 2.8 per cent, 1.7 per cent for Indonesia, 4.1 for Thailand. Now while India’s industrialists may benefit from this protection, it’s obvious that consumers like you and I are worse off — a one dollar Chinese T-shirt, for instance, will cost $1.21 for an Indian, $1.041 for an average Thai and a mere $1.017 for an Indonesian. Chew on that.

In fact, as Virmani’s group brings out very clearly, India’s tariffs have fallen at a pace embarrassing to even a snail — average collection rates fell dramatically from 42.2 per cent in 1990 to 23.3 in 1995 and then to a mere 21.1 in 1999. That’s just the tariffs, but industry actually gets protected by the exchange rate as well. To illustrate this, let’s say an imported shirt costs $1, the import tariff is 50 per cent and each dollar is worth Rs 30. That means the shirt will cost Rs 45 in the Indian market, and that’s the price Indian-made shirts will have to compete against. Now let’s say Yashwant Sinha cuts the duty level to 20 per cent. It’ll kill the local shirt market you’d think. Well, not if the rupee has fallen to, say, Rs 50 to the dollar. Because the effective price of the imported shirt is now Rs 60!

That’s, of course, a bit of a stark example since the rupee’s never fallen so dramatically in a single year. Also, what’s important is not so much the nominal exchange rate, but the rate that’s adjusted for inflation levels in India and abroad. But even when you apply what’s called the Real Effective Exchange Rate, you find India’s import tariffs have fallen only marginally over the past 5 years.

Apart from not forcing Indian industry to get competitive, the excessive protection also hits India’s exports as, in relative terms, the profits to be made in the local market are now higher than those for exports. So, entrepreneurs prefer not to enter the export market. By the way, the only time India’s export share in world trade rose in recent years was in the early 90s when import tariff levels fell significantly.

It’s possible that even after all this, you may still feel higher import duties are acceptable, because eventually these will protect local industry and therefore jobs. Actually, that’s another myth, though easier demolished. For one, high import tariffs kill export industries, and that’s a huge loss of employment potential. Second, if imports are significantly cheaper, whether it’s Chinese electronics now or South-East Asian synthetic fabric in the ’80s, they get smuggled in when the tariff barriers are too high. In which case, the local industry gets hit anyway, and jobs get lost anyway.

So who does the policy of high import tariffs really help? You do the math.

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