Customs reform: How a standard rate of 5% import duty could sharpen India’s export edge

It would be best not to limit the exercise to easing procedures and revising customs duty rates. The reform agenda must cover the entire gamut of non-tariff barriers from quality and technical standards to inspection delays, registration riddles and more.

India is a vast market. If Indian companies can compete with the world’s best at home for a slice of the consumer spending pie, they would be able to rival foreign businesses in global markets.

If the guiding principle of a customs rejig is clearly identified as making the economy more competitive, rather than shielding local industries that vie to be labelled critical or ‘infant’ in their pleas for tariff protection, it would help policymakers steer clear of special interest lobbies.

A good precedent for import duty reform was set by Yashwant Sinha as finance minister in the Vajpayee government. He cut India’s peak tariff, compressed a wide dispersal of rates into tariff bands and pushed them closer together over successive budgets to take the average effective rate down to about 7%.

Since then, our tariffs have lost their anchor in any tariff band and careened across the spectrum like particles in zig-zag motion. Our rates were raised and lowered to shelter and nurture specific sectors, with industries using tariffed products as inputs lumped with a higher cost burden that hurt their export efforts.

The goal now should be to set low and uniform duties that do not distort value generation at any stage of production. A standard rate of 5%, say, could be applied to imports. This would help sectors emerge that do not exist right now but could be brought to competitive scale by new entrants, aided perhaps by industrial-policy incentives if they need to be nurtured.

Right now, our framework is bent on keeping a set of manufacturers cushy behind tariff barriers while granting them duty-free access to some vital parts from abroad. This way, these inputs are unlikely to ever be made in India, while an equal-duty regime would let us discover what could well be churned out locally.

With world trade in flux, Indian barriers reduced to a common level could turn our comparative advantage dynamic, since equal exposure to global rivalry would help us spot export openings and push us to sharpen our edge.

Of course, exposing Indian producers to external competition is not a silver bullet. Local enterprises need access to talent, technology, energy and logistics at par with foreign players. We have made some progress on logistical efficiency; customs reform could improve upon that.

However, investment in human talent and intellectual property remains skewed and stunted. This is something we must address in mission mode, especially our R&D deficiency. The cost of capital matters too, as does the rupee’s value, so all efforts must run alongside sound fiscal and monetary policies.

Trade may be in a spot of trouble globally, as with other aspects of globalization, but we can bet that its logic will eventually prove hard to resist. And for rapid economic growth, we still need export success to play a major role. This may be just the right moment to align our policy settings for an export thrust over the next two decades.