The importance of addressing duty anomalies in trade deals

Context: India has long suffered the anomaly of imported raw material being taxed more than the finished product. Economists call it the inverted duty structure. A range of free trade agreements (FTAs) in the past have not helped. Are the new ones any better?

What is the main issue with the inverted duty structure?

Makes Indian-made products more expensive: When manufacturers cannot set off the taxes paid on raw materials against the tax on the final product, the excess tax paid on inputs gets built into the price of the product. This makes an Indian-made product more expensive than the imported finished product, affecting the competitiveness of Indian makers.

The issue is acute in sectors like textiles and apparels.

Correcting duty anomalies is key to attracting investments in manufacturing.

Will new FTAs worsen the problem? How are they different from previous FTAs?

Looks unlikely. The FTAs under negotiations are structurally very different from those signed a decade ago.

Older FTAs (signed in early 2000s)
Signed with manufacturing hubs, like ASEAN. Most of these countries directly competed with India and largely produced the same goods as India.
India agreed to lower or eliminate duties on finished goods. But import duty on raw materials remained  high. That  made it cheaper to import the final product than make them in India, hurting domestic manufacturers.

For instance: Share of ASEAN in India’s total imports has grown from 8.2% in FY11 to 12% in FY21, while exports have stagnated at 10%.

New FTAs
These are being signed by India are with countries like the United Arab Emirates (UAE) that share complementarities with India with respect to trade interests.
The UAE, for example, is a services, oil, and gold-led economy rather than a manufacturer. India benefits from duty-free access for mobile phones, which the UAE does not make.

Australia, which signed a pact with India recently, is again not a major manufacturing economy, but a services one with key interests in wines and minerals, pears, oranges, etc.

How is India addressing problems with the duty structure?

India has been increasing import duties since 2014-15 to correct the inverted duty structure for non-FTA countries and the average tariff rose from 13.5% in 2014 to 15% in 2020, according to the World Trade Organisation (WTO).

In fact, the last two budgets sought to correct it by removing duty exemptions and lowering the duty on raw materials.

Moreover, this time around, the government is holding consultations with the industry during the FTA talks, doing a SWOT analysis to ensure FTAs benefit India’s exports.

Source: This post is based on the article “The importance of addressing duty anomalies in trade deals” published in Livemint on 12th Apr 22.

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