Relevance: GS-3 : Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key Phrases: Import Tariffs, Amrit Kaal, Make in India, trade liberalization, PLI Scheme, inverted duty structure, global supply chain, market access, export destinations.

Why in News?

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

Key Points:

• The Union budget for 2022-23 talks about an “Amrit Kaal", or a Vision for India at 2047, when the country is expected to become the third largest economy in the world.
• The government wants to boost “Make in India", reduce import dependence, and promote exports.
• In this light, decoding India’s tariff and trade policy has become increasingly difficult for trade experts.
  • Conventional trade theories say that trade liberalization through tariff reduction would lead to greater market integration with the world economy.
  • Yet, over the years, India seems to have increased import tariffs for selective products.

Steps Taken:

• The previous budget focused on Production Linked Incentive (PLI) schemes to scale up domestic manufacturing.
• Efforts have been made to reduce inverted duties in sectors like medical devices, which were hampering Make in India.
• More than 75% of India’s demand for medical devices is met through imports and many studies confirmed that higher import duties on raw materials/intermediate products than on finished medical devices were hampering domestic production.
  • Stakeholder consultations organized by the ICRIER on autonomous tariffs versus trade agreements, covering over 30 industries, confirmed that most of the issues related to inverted duties have been resolved.
• There remain issues in certain sectors like alcoholic beverages where both the final and intermediate products face duties and cesses of around 150% in total, which has been a concern for India’s trading partners and the domestic industry alike.
  • However, it can be used as a bargaining tool in our ongoing trade negotiations.
• Addressing the problem of inverted duties over the last couple of years has led to the rationalization of customs exemptions, imposition of new tariffs and reduction in tariffs for certain products.
  • In some sectors like electronics, this has delivered positive results. India, for example, has started manufacturing smartphones.

Global examples:

• India’s average tariff rate(15%), compared to countries like Australia (2.4%) and New Zealand (1.9%), is quite high.
• However, 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.
• 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.
  • Interestingly, both ROK and Thailand have been able to develop domestic manufacturing capabilities and integrate well with global supply chains through their trade agreements.
  • India may be looking at the models of Thailand and ROK as it designs its policies.

Way Forward:

• India’s previous trade agreements were mostly geo-strategic, but New Delhi is now focusing on greater market access in key export destinations.
  • After withdrawing from the mega-regional agreement, the Regional Comprehensive Economic Partnership (RCEP), and implementing several measures to restrict imports from China, India quickly sealed a deal with its transhipment hub, the UAE.
  • Sectors like gems and jewellery and engineering already see this as a key export-promotion agreement.
  • An early-harvest pact is on the cards with Australia, which is a key partner in supply-chain initiatives along with Japan, which shares similar concerns about over-dependence on China.
  • The first round of negotiations with the UK, with which India has a positive trade balance in both goods and services, was complete by January 2022.
  • And India has relaunched trade talks with the EU.
• Trade talks could be launched with the US also, but Washington is the world’s toughest trade negotiator and it is better to have domestic policy regimes in place for areas like data sharing before such negotiations.
• In terms of the selection of export destinations as trade-agreement partners, India seems to have followed the right strategy.
• India is also trying to make its domestic subsides/incentive regime WTO-compliant.
• A huge thrust has been given to quality improvement, product standardization and infrastructure and logistics development, so as to reduce costs and enhance our export competitiveness.
• There is an effort to use high tariffs as a tool to:
  1. Facilitate investment in domestic manufacturing; and
  2. Bargain for greater market access in trade deals through reciprocal tariff reductions and also in areas like regulatory compliances and mutual recognition of technical standards.

Conclusion:

• In this entire process of restructuring, some industries will gain and others will lose. But overall, there seems to be alignment of trade and domestic policies. The next couple of years will be crucial to understand whether India can replicate the success story of countries like ROK and Vietnam.

Source: Live-Mint

Mains Question:

Q. Trade liberalization through tariff reduction would lead to greater market integration with the world economy. Analyse Critically in context of India’s Trade deficit. (250 Words).