Budget’s most far-reaching change is in tariff rationalization

The Budget might have done for Indian exports what trade policy hasn’t been able to.

By Amitendu Palit 

The attention on income tax reliefs for the middle class has snatched focus from rationalization of customs duties in the Union Budget.

The Budget speech alluded to addressing duty inversion as one of the goals behind its customs duty proposals. An inverted tax structure arises when taxes on raw materials and intermediate inputs are higher than taxes on final products made from these raw materials and intermediates. Inverted customs duty structures are those where duties on imported inputs are higher than those on final products.

Inverted customs duty structures have been one of the biggest impediments to competitiveness of Indian exporters. Imposed mostly ad-hoc, in response to specific demands for import protection, the duty inversions have adversely affected prospects of Indian exporters in overseas markets. Very often, high customs duties on imported inputs have inflated cost of production leading to high prices of final products, which, ironically, have been higher than their imported substitutes, even after tariffs.

This was a pernicious legacy that needed correction. The Budget has made a significant beginning in this regard. This is visible from the large number of items on which basic customs duties (BCDs) have either been scrapped or reduced. The most notable examples are for parts and components used in manufacture of LCD/LED TVs; capital goods used for making lithium-ion batteries; textile machinery; knitted fabrics; critical minerals; telecom equipment; chemicals; food and beverages; plastic products; footwear; jewellery parts; copper, lead, tin and a number of other waste and scraps; solar modules, semiconductor devices and photovoltaic cells.

As overall effective customs duties on these products reduce following the cuts in BCDs and withdrawal of social welfare surcharge on more than 80 tariff lines, several impacts will follow.

First, many Indian exports will become more competitive as the cost of imported inputs reduce. There will still be issues with domestic conditions, including logistics challenges, and procedural bottlenecks. But these are ‘behind the border’ issues and perhaps not entirely within the purview of the Union Budget. Combined with trade facilitation measures, particularly extending the time for end-use of imported inputs, the prospects for exports certainly look brighter.

Second, domestic producers of several items are going to benefit significantly from lower customs duties on imported parts and components. This particularly applies for electronic products that are being produced in India and which include imported parts. In semiconductors for example, Indian enterprises engaged in assembling, testing and packaging operations, will benefit significantly from lower customs duties on imported inputs.

Third, on the whole, more cost efficiency for exporters and domestic producers, make India well positioned for navigating a complicated scenario in world trade. Concentration of global cross-border trade and investments among geopolitically aligned partners was already noted during the last couple of years. With more back and forth tariffs coming up across the world as the Trump Administration uses tariffs for extracting strategic gains, more diversion in global trade is likely.

At a time when the GDP growth is slowing, and domestic consumption and private investments are not displaying spirited trends, exports are important for maintaining the growth momentum. New markets need to be accessed by Indian manufacturing exports. In this regard, upping their competitiveness by lowering costs of production is essential, especially in a scenario of unilateral and reciprocal tariffs.

The Budget appears to have pre-empted the otherwise dim prospect for India’s manufacturing exports given their rather weak performance last year. These need a strong shot-in-the-arm. India’s traditional ‘hot’ exports, such as textiles and jewellery, are unable to buck global pushback trends. More sectors might be in trouble as domestic slowdown and lower capacity creation couple with tariff complications. The Budget might have done for Indian exports what trade policy hasn’t been able to.

(Amitendu Palit is Senior Research Fellow and Research Lead (trade and economics) at the Institute of South Asian Studies in the National University of Singapore.)

Views are personal and do not represent the stand of this publication.