THERE is a widespread but fallacious perception that India’s tariffs are inordinately high. There are subjective factors when it comes to a country, like livability, public courtesy or even how foreigners are welcomed. But tariffs are quantifiable and there should really be no place for subjectivity.
Let us consider the facts in the case. But before we do that, however, it may be useful for the average reader to know what function tariffs perform in a low-income developing country like India, as opposed to a high-income developed country like the United States. Traditionally, low-income developing countries use tariffs for two reasons: Firstly, to protect their domestic industry and secondly, to gain revenue from it.
Protection of domestic industry is an accepted argument by economists all over the world, especially if the industry is an infant one and the country needs to develop an industrial base.
Then, there is the revenue-gaining function, which is illustrative of a country’s duties on alcohol or luxury motorcycles, for instance.
India’s tariffs, which were high in the 1980s, have been brought down significantly since the 1991 reforms and the Uruguay Round negotiations that led to the establishment of the World Trade Organisation (WTO). Since then, the secular trend in India has been one of gradual reduction of the applicable tariffs year after year.
From a technical point of view, there are two kinds of tariffs that countries have. One is applied tariffs, which as the name indicates, is the actual tariff (normally ad valorem) imposed at the border when a foreign good enters a country.
The other is bound tariffs, which are the maximum tariff that a country can impose on a foreign good from a legal obligation arising from its most-favoured-nation commitments to the WTO.
It goes without saying that the tariff war initiated by the US violates its commitments under the WTO agreements. But the WTO itself has been moribund for a while.
It is also worth noting that tariffs cannot be the same for all countries. It is a truism that low-income developing countries will have higher tariffs (for reasons mentioned above) compared to G7 countries.
So, where does India figure in all of this? When India is judged on tariffs, two parameters are used – one is the simple average tariffs and the other is trade-weighted tariffs.
If you use the former metric, India’s tariff does seem high (15.98%). But this is in many ways academic because for most of the goods that come into the Indian market, it is the trade-weighted applied tariff that matters. And the trade-weighted tariff that India maintains is a respectable 4.6%.
This level of tariff gives the lie to claims that India is somehow a “tariff king”.
Simple averages distort the picture since they treat all products alike, regardless of the trade volumes. So, why is there such a big difference between India’s simple average tariff and its trade-weighted tariff?
India does maintain relatively high tariffs in agriculture and automobiles. In both these cases, the main purpose of the tariffs is to protect the domestic industry.
Agriculture in India is sui generis and like no other major country in the world. Around 50% of India’s mammoth population directly or indirectly depends on agriculture.
Besides, agriculture in India is not mechanised and land holdings are so small that farming is about survival and not about commerce.
Asking India to open its farm sector to imports is akin to asking it to commit suicide, which no elected government in India would agree to. This demand is especially egregious since Western farmers are beneficiaries of direct and indirect subsidies.
Given all of this, India does maintain relatively high tariffs for agricultural products, average rates of around 33% on meat, dairy, fruits and cereals. But this is not surprising if you consider the fact that the European Union’s average rate is 37.5% on dairy products, going up to 205%, and up to 261% on fruits and vegetables.
Compare this with Japan, whose rate is 61.3% on dairy products, going up to 298%, and up to 258% on cereals and 160% on meat and vegetables. Or South Korea, whose average is 54% on agricultural goods, with 800% on vegetables and 300% on fruits.
Who is the tariff king in agriculture, you may ask?
As for automobiles, this sector creates mass employment and is crucial for that reason. Even India’s simple average tariff levels at 15.98% are in line with global norms for developing economies.
Bangladesh (14.1%), Argentina (13.4%) and Turkiye (16.2%), which are all countries with comparable or higher GDP per capita, maintain similar or higher tariffs.
On the US saying their exports of non-agricultural products face tariff barriers in India, it is worth noting that US exporters often face equal or lower tariffs in India compared to many Asian peers.
In electronics and technology, for instance, India has 0% tariff on most IT hardware, semiconductors, computers and associated parts, with average tariffs of 10.9% on electronics and 8.3% on computing machinery.
In comparison, Vietnam has a tariff of 8.5% on electronic equipment, going up to 35%. China has a tariff rate of 5.4%, going up to 20% on electronics and up to 25% on computing machinery.
Indonesia has a tariff rate of 6.3% on electronic equipment, going up to 20% and up to 30% on computing machinery.
India maintains justifiable tariff protection for its agricultural, dairy and auto markets for valid reasons but its trade-weighted applied tariff in other sectors does not justify it being called a “tariff king” at all.
Dr Mohan Kumar is a former Indian ambassador and is the director general of the Jadeja Motwani Institute for American Studies at OP Jindal Global University, India. Comments: letters@thesundaily.com