Method to the Make-in-India plan: Decoding our import tariff policy

News: According to the World Trade Organization’s (WTO) Tariff Profile for 2021, India has one of the highest average tariffs of 15% in the Asia-Pacific region.

This article discusses the need to align Make-in-India with trade policy.

How Make-in-India plan and trade policy is evolving?

First, the government wants to boost “Make in India”, reduce import dependence and promote exports to become the third-largest economy by 2047. For instance, Production Linked Incentive (PLI) schemes to scale up domestic manufacturing.

Second, many studies confirmed that higher import duties on raw materials/intermediate products than on finished medical devices are hampering domestic production. Hence, inverted duties are reduced in sectors like medical devices.

Third, the government has rationalized customs exemptions, imposed new tariffs, and reduced tariffs for certain products to resolve the issue of inverted duties. This has delivered positive results in electronics and India has started manufacturing smartphones.

Fourth, India’s previous trade agreements were mostly geostrategic, but now India is focusing on greater market access in key export destinations. For example, after withdrawing from the Regional Comprehensive Economic Partnership (RCEP), India sealed a deal with the UAE.

Fifth, India is focusing on finalizing the early-harvest pact. For example, Australia shares similar concerns regarding over-dependence on China and UK. Also, India has relaunched trade talks with the EU.

What other countries are doing?

High tariffs are not uncommon in South Asia. The average MFN tariffs of Bhutan (22.1%), Bangladesh (14%), Nepal (12.2%), and Pakistan (12.1%) are all high, but these countries are yet to integrate well with global value chains.

Also, India’s free-trade agreement (FTA) partners like the Republic of Korea (ROK, 13.6%) and Thailand (10.2%) also have fairly high average autonomous tariffs. But both ROK and Thailand have been able to develop domestic manufacturing capabilities and integrate well with global supply chains through their trade agreements.

What does India need to learn from previous agreements?

India’s comprehensive economic partnership agreement (CEPA) with ROK has been a key learning experience. For example, according to the United States Geological Survey (2020), India was the fifth-largest zinc miner, while ROK was not among the top 10.

But after its trade agreements with India, Australia, China, and the US, ROK became the world’s leading exporter of zinc in 2020. Also, India’s imports from ROK increased from 9.1% in 2010-11 to more than 50% in 2020-21. In 2010-11, India had a trade surplus with ROK but in 2020-21, it had a deficit.

The ROK used smart negotiations on rules-of-origin and focused on domestic value addition. India should learn to use high tariffs and trade agreements as a tool to boost exports.

What is the way forward?

First, before launching trade talks with a smart negotiator like the US, India should have a domestic policy regime in place for areas like data sharing.

Second, high tariffs should be used as a tool to facilitate investment in domestic manufacturing and to bargain for greater market access in trade deals through reciprocal tariff reductions and also in areas like regulatory compliance and mutual recognition of technical standards.

Source: This post is based on the article “Method to the Make-in-India plan: Decoding our import tariff policy” published in Live mint on 22^nd Feb 2022.