Boosting trade

Lower tariffs will improve export competitiveness

Union Finance Minister Nirmala Sitharaman’s decision to reduce Customs duty on about 50 products must be welcomed. It can be seen as a move to shift the focus on increasing India’s external competitiveness. Ms Sitharaman also announced a comprehensive review of the Customs duty structure over the next six months. For now, Customs duty has been reduced or done away with for several products including mobile phones, leather, ferro-nickel, blister copper, and capital goods used in the manufacture of solar cells, modules, and petroleum-exploration operations. Most importantly, 25 critical minerals have been exempted from Customs duty. It will augment domestic production capacities in the renewable-energy sector and other strategic industries such as defence and e-mobility.

The shift comes several years after India’s trade policy seemingly embraced protectionism and import substitution. The tilt towards import curbs can be traced back to the Union Budget of 2018. In an attempt to protect domestic industry and promote job creation, import tariffs were raised on more than 40 items, ranging from auto parts to candles and furniture. Earlier, India had raised import duties on several electronic items, like mobile-phone components, televisions, and microwave ovens. In the decade spanning from 2010-11 to 2020-21, India’s average tariff increased significantly. The proportion of India’s tariff lines exceeding the 15 per cent mark rose from 11.9 per cent to a staggering 25.4 per cent.

The government has, however, done well to no longer treat Customs duty as a revenue-raising instrument. It is now well accepted that only trade openness can help India become a part of key global supply chains, such as those for smartphones and consumer electronics. India’s exports of mobile phones rose over 40 per cent to reach $15.6 billion in 2023-24 from $11.1 billion in 2022-23, while the country manufactured electronic goods worth $102 billion last year. Yet, export growth has been propelled primarily by assembly rather than manufacturing within the country. The production of sophisticated components like lithium-ion cells or semiconductor chips is not happening in India. In fact, most of the value is being added in countries such as China, South Korea, Japan, and Vietnam.

Non-tariff barriers also remain high. The data released by the World Trade Organization (WTO) in its World Tariff Profile 2024 reveals that after the United States India imposed the highest number of anti-dumping duties. In 2023, India initiated 45 anti-dumping investigations and imposed duties in 14 cases, while the country had 133 anti-dumping measures in place, affecting 418 products. The number of countervailing duties also remains high. In 2023, India imposed countervailing duties in 17 cases covering 28 products. As an exporter, a total of 44 countervailing actions covering 173 products are currently in force against India. Nonetheless, there seems to be a shift in strategy. According to the WTO data, India’s average tariff fell from 18.1 per cent in 2022 to 17 per cent in 2023. India needs to cut tariffs significantly across the board and bring them down to levels prevalent in the region. It is to be hoped that the review of Customs rates will make a significant move in this direction. Meanwhile, Indian businesses must prepare to deal with increased global competition. Lower tariffs will also help boost competitiveness.