Keep fine-tuning those customs duties

The first budget in the third term of NDA may be a good opportunity to address the dichotomy between higher import duties and rising import dependency on industrial products, particularly from China. NDA has used customs duties creatively to protect some industries from predatory pricing. This is not a blanket protection for all industries, and there is a realisation that the economy will have to transition to a lower tariff structure for domestic manufacturing to reduce import dependency. But this dependency is increasing vis a vis China, whose share of industrial imports is now around 30% and rising twice as fast as imports from the rest of the world. This percentage climbs in sectors such as electronics and telecom, where India is gaining traction in the export market.

The creativity in calibrating customs duties lies in setting them high enough for import substitution but not high enough to affect export competitiveness. That involves a progressive easing from infant to mature industries. Import dependency will rise initially as exports increase, eventually as local value chains are seeded and plugged into global chains. The result should yield diversified value chains not dependent on single-country imports. Some adjustments in customs duties on electronic components may thus be called for immediately, while for others, such as automobile components, the risks of dumping by China may be higher. The caveat is that tariff protection can delay export competitiveness if left unadjusted for too long.

The dual nature of customs duties as a provider of protection and revenue allows for continuous fine-tuning. The budget could, however, signal an acceleration towards a low-tariff regime. Although this depends on the relative export performance of a host of industries, certain macroeconomic yardsticks could be set to indicate a medium-term trajectory for the basic customs duty. A GDP growth rate of around 8% depends on a solid manufacturing export performance. Lower import tariffs would be a measure of that performance.