Boosting manufacturing: Lower import barriers will increase exports

The Union government’s decision to exempt certain inputs from Customs duty has not come a day too soon. Last week, the government decided to exempt several parts and machinery used in manufacturing automotive, industrial and medical equipment, mobile phones, and lithium-ion cells from Customs duty. The applicable duty on these items was in the range of 7.5 per cent to 15 per cent. As this newspaper reported, a larger list of machines used in producing lithium-ion cells is now exempted from duty without the end-use restrictions. It has been argued that the measure is intended to support the domestic electronics industry at a time when the crisis in West Asia has disrupted supply chains and driven up costs. The exemption will remain in effect until the end of March 2029. 

While the decision on duty exemption must be welcomed, the end date underlines India’s inherent reluctance in liberalising imports. The identified sectors don’t need such policy support just because of global supply-chain disruption or geopolitical tensions. Indian businesses need lower duties to become more competitive in general. An end date for exemption would only likely benefit incumbents and may not inspire new investment in these sectors. There are compelling reasons to reduce import duties. Economists have long argued with evidence that import duties effectively act as a tax on exports. India needs a broader review of its tariff structure. While lower restrictions on imports are critical for boosting production and attaining export competitiveness in general, it is particularly important in electronics and related products. 

As a 2024 NITI Aayog report underscored, about 70 per cent of international trade comprises items that are part of global value chains (GVCs). In the case of electronic items, it goes up to 80 per cent. Thus, if India is to integrate into GVCs in general, and for electronic goods in particular, it will need a competitive tariff structure. Import restrictions and high tariffs create friction, affecting participation in GVCs. As the NITI report rightly noted, India’s tariff structure, with multiple slabs, often leads to misinterpretation and disputes. Frequent revisions also create their own set of problems. All of these issues, which put Indian producers and exporters at a disadvantage, are avoidable. Tariffs and other forms of protection have not really helped India expand its industrial base significantly. It must also be noted that when foreign or domestic businesses start producing inputs or machinery with the benefit of tariff protection, they tend to sell their products at comparable import prices. Thus, it does not benefit exporters. 

Nevertheless, it is worth noting that India has done reasonably well in the production and export of electronic goods in recent years, partly because of the success of Apple’s iPhone production. Notably, while India’s merchandise exports went up just about 1 per cent in 2025-26, electronics exports increased over 24 per cent. Thus, there is a clear opportunity for India in this space. With supportive policies, as production and exports gain scale, component manufacturers will also be encouraged to set up operations in India to take advantage of the opportunity. Trade is also a significant driver of foreign direct investment. India has done well to sign relatively deep trade agreements in the recent past, including with the United Kingdom and the European Union. An agreement with the United States is also on the cards. However, to take full advantage of these agreements, India must be prepared. Deeper integration into value chains will provide longer-term benefits.