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Budget dilemma: which way should duties head?

Vidya Ranganathan

BUDGET 2001

India's tentative embrace of the free market faces a key test next week when Finance Minister Yashwant Sinha decides where to set import duties in the annual Budget.

Analysts say the reform-minded Sinha is expected to resist pressure from industry and opposition leaders for higher tariffs, as part of his ongoing drive to liberalise the economy.

"Lowering the average rate of tariffs and continuing with the liberalisation of the trade regime is the direction the Budget should take," said S Bhide, chief economist at the think-tank National Council for Applied Economic Research.

"It will force an improvement in competitiveness and prevent allocation of resources to inefficient sectors," he said.

However, the decision on duties in Wednesday's Budget is all the more sensitive as India prepares to drop the last of its quantitative restrictions (QRs) on imports to meet World Trade Organisation commitments.

These QRs, a relic of the country's past policy of matching political non-alignment with economic self-sufficiency, can be replaced under WTO rules by higher tariffs.

Industry leaders and opposition leaders, fearing a flood of cheap imports from China and East Asia, are pressing hard to keep tariffs high, and in some cases increase them.

But analysts say that Sinha is likely to resist pressure to hike import duties when QRs on over 700 items, mostly textiles, farm and consumer goods are dropped on April 1.

Media reports have quoted Commerce and Industry Minister Murasoli Maran as saying domestic industry should focus on efficiency rather than seek protection.

Maran has however added a safety net -- he has promised a bill next week which will allow the government to hike tariffs on any product which becomes vulnerable when QRs are dropped.

Officials and analysts say that the threat posed by cheap imports following the scrapping of QRs had been exaggerated.

In fact, government officials said they had actually found a decrease in imports, excluding oil and gold, after the partial removal of QRs last year.

The perceived threat from China was also overplayed, said Arun Goyal, director at Delhi's Academy of Business Studies.

He noted that Indian exports to China exceeded imports from there and, in areas where the two compete, Indian products were of a superior quality.

And hiking duties could be counter-productive since industry has very strong inter-sectoral linkages, analysts said.

The freeing of imports has been a boon for the consumer who no longer has to pay a high premium for smuggled international brands, particularly processed foods, toiletries and apparels which are now sold off shop shelves legally.

Total imports, however, still account for only 13 to 14 per cent of GDP while industrial imports, excluding oil and key farm items like fertilisers account for less than six per cent, said T K Bhowmick, senior advisor at the Confederation of Indian Industry (CII).

But while Sinha is expected to resist pressure to raise tariffs, his scope for lowering them is limited by the need to curb the Budget deficit while also raising funds to pay for reconstruction after last month's devastating earthquake.

The quake in Gujarat killed at least 30,000 people and caused damages worth at least Rs 200 billion.

Indian tariffs are higher than averages in south-east Asia, though they are below the maximum rates set by the WTO.

India's peak tariff on industrial products is 40 per cent, and the mean 27.5 per cent tariff compares with 12 to 13 per cent in the Association of South East Asian Nations (ASEAN).

Domestic industry has been lobbying hard to keep tariffs high in most sectors given sluggish industrial production.

The CII in its budget wish-list, said there was no need for a cut in peak tariffs and also argued that reducing rates now would restrict country's bargaining space at the next round of WTO negotiations.

The Federation of Indian Chambers of Commerce and Industry (FICCI) had a similar wish-list. "There should be no further reduction in import duty for a period of 2-3 years," it said.

In specific sectors though demands are more diverse.

Telecommunication firms have asked for lower duties on cellular handsets to counter cheaper smuggled goods while the auto industry has asked for high duties and other safety conditions to be imposed on imports of second-hand cars.

The petroleum ministry wants lower duties on petroleum products and crude oil and the paint industry is asking for lower tariffs on raw materials.

The one area where analysts believe India could rightfully use tariff walls to prevent dumping is agriculture, where India is grappling with a huge 40 million tonnes stockpile of foodgrains and which in most countries is subsidised.

"Agriculture is so heavily and irrationally subsidised in most countries, including India, that world prices represent the dumping of politically created surpluses on the market, not efficiency," the Economic Times editorial said this week.

Economic Survey 2000-2001
Budget 2001
Money

EXTERNAL LINK:
Economic Survey on the official Web site of the Ministry of Finance

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