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Informist, Thursday, Nov. 28, 2024

 

By Sagar Sen and Krity Ambey

 

NEW DELHI – At a time when US President-elect Donald Trump is proposing a massive hike in tariffs, a trade expert has proposed that India "take a hard look" at the tariff system and cut duty on products with low revenue to bring down the average tariff below 10%. This can help strengthen India's manufacturing sector, as well as give it an edge in bargaining against the possible protectionist measures by the US, according to Global Trade Research Initiative Founder Ajay Srivastava.

 

"We did an exercise and found that more than 90% of our import tariff was collected from less than 10% of the tariff lines, the bottom 60% of tariff lines contributed to less than 2% or 3% of revenue," Srivastava told Informist in an interview. "Where there are no imports, why not make it zero or 2-3%? It will immediately bring down your average tariff from 17% to 8-9%." Customs duty collections are about 7% of the Centre's total tax collections.

 

There are cases where import duty is lower on finished goods than on raw materials, Srivastava said. "So we need to lower tariffs on raw materials, otherwise nobody will make in India."

 

US President-elect Trump has proposed massive tariff hikes, especially on goods from Mexico, Canada and China, to protect domestic manufacturing. During campaigning, Trump had said his government would impose high tariffs on countries that have a trade surplus with the US. Trump has called India, which had a trade surplus of $35.32 billion in 2023-24 (Apr-Mar) with the US, a "tariff abuser".

 

A lower average tariff can give India a better edge in bargaining against the US, according to Srivastava. "Trump has called, in the past four years, India a tariff abuser, a tariff king, and so many other things. He picks items like whiskey, where India charges 150%, while the US charges less than 10%, and says they should charge as high as India," Srivastava said. "But these are outlier tariffs. India's highest tariff is on alcohol or wines, which is 150%... US's highest tariff is 600%, Japanese highest tariff is around this."

 

"We have a ready response that their highest is higher than our highest. But we also have to judge a country by the average tariff," Srivastava said. "There, I feel, our average tariffs are on the higher side. We should bring it further down." Srivastava, a former Indian Trade Service officer, founded the think tank Global Trade Research Initiative after taking voluntary retirement from the Government of India in 2022.

 

"There is a need for a hard look at our current tariffs. We can reduce tariffs without hurting any of our interests," Srivastava said. India has never had a comprehensive tariff exercise in the last 25 years, said Srivastava, who was part of India's negotiating teams for the World Trade Organization.

 

"India's average tariff is high at 17%, while the US has it at 3-4% only," Srivastava said. "China's average tariff is 7.5%, Korea 13.5%."

 

Below are the edited excerpts from the interview: 

 

Q. India's merchandise exports, with a growth of 17.3% in October, showed a significant recovery. But do you think the recovery is likely to persist in the coming months?

A. I don't give much credence to the monthly or even quarterly data, because the issues which are impacting global trade are medium-term sorts. For example, the three pressing issues would be what Trump does next, the second is European green laws and how they will be impacting our exports. Third is how China-India plays out in economic terms.

 

While October data shows some signs of recovery, I'd prefer to wait for some more time because of so many uncertainties. We still don't know what is happening to the Red Sea route, which has been problematic for more than a year now. Similarly, we don't know about the Russia-Ukraine conflict, our imports were impacted because of that. I'd prefer to wait for three or four more months before I can make up my mind how it is going to happen. But overall, we can say about 5% growth rate (in exports) is almost assured.

 

Q. You mentioned that one of the pressing issues could be the tariff measures that the US may announce after Trump assumes office. What are your expectations, and how do you think India can address the potential challenges? 

A. He is getting re-elected on the plank that he will bring back manufacturing into the US and that will create a lot of jobs. That's the most important reason for his win apart from his stance on immigration. But what about India? Trump has called, in the past four years, India a tariff abuser, a tariff king, and so many other things. He picks items like whiskey, where India charges 150%, while the US charges less than 10%, and says they should charge as high as India. But these are outlier tariffs. India's highest tariff is on alcohol or wines, which is 150%. So our highest tariff is 150%, US's highest tariff is 600%, Japanese highest tariff is around this. Our highest tariffs are reserved for exceptional 1-2% items. We have a ready response that their highest is higher than our highest. But we also have to judge a country by the average tariff. There, I feel, our average tariffs are on the higher side. We should bring it further down. So we need to maybe give a hard look at our tariffs, what should be done about them.

 

Q. You mentioned that there is a need to take a hard look at our tariff system and reduce the average tariff. Can you elaborate on what measures can be taken in this regard?

A. We did an exercise and found that more than 90% of our import revenues were collected from less than 10% of the tariff lines, the bottom 60% of tariff lines contributed to less than 2% or 3% of revenue. Where there are no imports, why not make it zero or 2-3%? It will immediately bring down your average tariff from 17% to 8-9%. There are many items where the tariffs on finished goods are lower than the tariffs on raw materials. So we need to lower tariffs on raw materials, otherwise nobody will make in India. We never had a comprehensive tariff exercise in the last 25 years. There is a need for a hard look at our current tariffs. We can reduce tariffs without hurting any of our interests. 

 

Q. You mentioned that the second pressing issue is the implementation of green laws by the European Union. In this context, how do you think India should navigate?  

A. The green laws proposed by the EU are trade protection measures, they want to protect their industry. On the Carbon Border Adjustment Mechanism, the UN Trade and Development says it will have no impact on the environment. It would have had an impact on the environment if they said that they would not accept dirty steel, steel which has high carbon emissions embedded into it. But they will accept everything. For dirty steel, we will have to pay more to them, for green steel, we have to pay less. They are the largest market with about $4.5 trillion worth of imports. If they take 10%, on average, from CBAM (Carbon Border Adjustment Mechanism), they would get $450 billion. Their budgetary deficit is just about $900 billion to $1 trillion, so they will wipe out half the budgetary deficit with this. It's all a revenue measure.

 

Similarly, about their deforestation law, they say any product grown on any land which has been deforested after Dec. 31, 2020, we cannot supply to the EU. But even if I am not using such land, I have to give so much data, like landholder's name, from where I have taken seeds and fertilisers and insecticides. Data points are more than 500. They have destroyed 85% of their forest already. They have polluted the environment, and now they are using these words to collect more revenue.

 

We should take only one retaliatory measure, we have done this earlier in March 2018, when Mr. Trump imposed tariffs on Indian steel and aluminium exports to the US, we calculated the likely revenue the US would be collecting through additional tariffs on our aluminium and steel. We identified some other items which we were importing from the US, and we imposed tariffs on them so that we could also collect the amount of tariff that they expected to collect from us. You tell them you are doing this, and you can always call it a farce, the EU laws on deforestation and CBAM are not environmental measures.

 

So calculate and retaliate in precise measure. Act like a sovereign power, don't be a handmaiden of any country. We are friends with everyone, but if you do some harm to us, we'll do equal harm to you.

 

Q. The commerce ministry has said that it is working on putting in place a standard operating procedure for negotiations of free trade agreements so as to avail maximum benefit from the pacts. How do you think the new SOP can help? 

A. Whenever we used to go for negotiations, suppose there are 10 negotiating subjects, for each of them there was one person. On the opposite side, there were 20 to 30 people — there was a chief negotiator and others were understudies. They watched, helped with data, imbibed, and they became the future negotiators. So they had on-the-job training. But in India, we save only one person and hope that others would learn by reading SOPs. That's not going to happen. SOP will be as useful as a training manual for a fighter pilot. A user manual cannot replace the learning from a real flight. There is no replacement for institutional memory. For example, in an FTA, we generally don't allow lowering of import duty on gold, yet due to some oversight or so, we lowered duty on gold under the FTA with the UAE (United Arab Emirates). Then India had to cut tariff, and has to re-negotiate now. The oversight may not have happened, had there been institutional memory.

 

The SOP has its place but the commerce ministry should not be talking about all this. These are internal documents, every organisation prepares internal guidelines. Broad guidelines were available earlier as well, but now they want to polish them further, make them more sophisticated and more comprehensive. But it should be constantly updated by the people who are negotiating, it should be a work-in-progress document.

 

Q. What do you think are the hindrances to India's export competitiveness that the government needs to address?

A. Usually high-technology and very-high-technology goods. For example, an iPhone faces fewer entry barriers, but we are mostly into low-technology, medium-technology goods. Now, with low-technology goods, for example textiles, we have to compete against the likes of Bangladesh and Cambodia. In this context, there are some issues that need to be addressed. One is the higher cost of raw materials. In China, most of the raw material is available indigenously. They have a lot of raw material, or they import it at zero duties. Let's say, I am making a transformer, for that I need to import CRGO (cold rolled grain oriented) steel, we don't make it in India. With tariff, raw material cost will be high. Second is the power cost, compared to China, it is almost one-and-a-half times higher. Power is not uninterrupted for industrial purposes, so most of the large industries have to put their captive power plant, which raises the cost. Third is capital cost. In China, capital is available at 4-5%, here it is 8-12%. Micro, small and medium enterprises don't get any capital without a collateral, even with collateral, they may hardly get it. Then land, that is very expensive and acquiring land may take one-three years. Then logistics is an issue, about 90% trade happens through foreign ships, and they may choose not to visit India if there is any problem. We do not make containers. We need to address all of these, improve all of these.  End

 

US$1 = INR 84.49

 

Edited by Namrata Rao

 

 

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