Why in news?
The United States recently imposed 50% tariffs on a range of Indian goods, reigniting debate on India’s high import duties. The U.S. has labelled India the “Tariff King”, highlighting the need for tariff reforms to improve competitiveness and attract investment.
Historical background
After independence, India adopted a protectionist trade policy to nurture infant industries. Import duties shielded domestic producers and generated revenue. Economic reforms in 1991 reduced tariffs substantially, but agriculture and certain industries continued to enjoy high protection. Today India’s simple average tariff stands around 16%, the second highest among G20 countries, with agricultural tariffs averaging more than 60%.
Why rationalise tariffs?
- Boost competitiveness: Lower duties encourage efficiency and innovation. For example, tariff cuts on automotive parts in the 1990s spurred a globally competitive automobile industry.
- Consumer welfare: Cheaper imports of edible oil, pulses and inputs can ease inflation and improve nutrition.
- Attract investment: Predictable tariffs signal openness to global value chains and help India tap the “China + 1” strategy of investors diversifying supply chains.
- Trade negotiations: Rationalised tariffs strengthen India’s hand in free‑trade talks with the European Union, the United Kingdom and the Gulf Cooperation Council.
- Avoid retaliation: High duties invite counter‑tariffs that hurt exporters, as seen in the recent U.S. move.
Challenges
- Agricultural interests: Nearly half of India’s workforce depends on farming. Cutting duties on milk powder, edible oils or pulses without safety nets could provoke protests.
- Revenue concerns: Customs duties contribute significantly to government finances. Alternatives like expanding the tax base are needed to offset any shortfall.
- MSME protection: Small manufacturers fear being outcompeted by cheaper imports. Productivity upgrades and credit support are essential.
- Logistics deficits: Poor roads, ports and cold chains reduce the benefits of tariff cuts. Without better infrastructure, competitiveness gains may not materialise.
- Policy inertia: Powerful lobbies favour status quo protection. Reform requires political will and consensus building.
Suggested reforms
- Tiered tariff structure: Set low or zero duties on raw materials, moderate rates on non‑sensitive goods, higher rates on sensitive items and the highest on luxury goods. Use tariff‑rate quotas to allow limited low‑duty imports for vulnerable sectors.
- Improve farm productivity: Double public spending on agricultural research and promote precision farming and micro‑irrigation to help farmers compete globally.
- Reform subsidies: Move fertiliser subsidies to direct cash transfers to reduce leakages and encourage efficient use of inputs.
- Strengthen value chains: Invest in storage, cold chains and logistics. Support Farmer Producer Organisations to aggregate produce and access markets.
- Simplify customs: Align tariffs with GST principles, reduce discretionary exemptions and implement digital customs platforms for faster clearances.
Conclusion
India must transition from protectionism towards an outward‑oriented, innovation‑driven trade policy. Imports should be viewed not as threats but as inputs that drive competitiveness. Rational tariffs, coupled with support for farmers and small businesses, will integrate India into global value chains, boost growth and benefit consumers.