By Mohan Kumar
Former Indian Ambassador and Director General of Jadeja Motwani Institute for American Studies
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. So, let us consider the facts in the case.
Before we do that, however, it might be useful for the average reader to know as to what function tariffs perform in a low-income developing country like India, as opposed to say, a high-income developed country like the United States of America. Traditionally, low-income developing countries use tariffs for two reasons: one, to protect their domestic industry and two, 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, were brought down significantly since the 1991 reforms were initiated and during the negotiations related to the Uruguay Round, which led to the establishment of the World Trade Organization (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 one is bound tariffs, which is the maximum tariff that a country can impose on a foreign good from a legal obligation arising from its most-favored-nation (MFN) commitments to the WTO.
It goes without saying that the tariff war initiated by the U.S. is in violation of its commitments under the WTO agreements. But then, 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, there are two parameters which are used. One is simple average tariffs, and the other is trade-weighted tariffs. If you use the former metric, India’s tariff does seem high (15.98 percent). 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 very respectable 4.6 percent. 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 domestic industry. Agriculture in India is sui generis and like no other major country in the world. Around 50 percent of India’s mammoth population directly or indirectly depends on agriculture. Besides, agriculture in India is not mechanized 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 agriculture products, average rates of around 33 percent 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 percent on dairy products going up to 205 percent, and up to 261 percent on fruits and vegetables. Compare this with Japan whose rate is 61.3 percent on dairy products, going up to 298 percent, and up to 258 percent on cereals, and 160 percent on meat and vegetables. Or South Korea, whose average is 54 percent on agricultural goods with 800 percent on vegetables, and 300 percent on fruits. Who is the tariff king in agriculture, you might 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 percent is in line with global norms for developing economies. Bangladesh (14.1 percent), Argentina (13.4 percent), and Türkiye (16.2 percent), which are all countries with comparable or higher GDP per capita, maintain similar or higher tariffs.
On the U.S. saying their exports of non-agricultural products face tariff barriers in India, it is worth noting that U.S. exporters often face equal or lower tariffs in India compared to many Asian peers. In electronics and technology for instance, India has 0 percent tariff on most IT hardware, semiconductors, computers, and associated parts, with average tariffs of 10.9 percent on electronics and 8.3 percent on computing machinery.
In comparison, Vietnam has a tariff of 8.5 percent on electronic equipment, going up to 35 percent. China has a tariff rate of 5.4 percent going up to 20 percent on electronics, and up to 25 percent on computing machinery. And Indonesia has a tariff rate of 6.3 percent on electronic equipment, going up to 20 percent, and up to 30 percent on computing machinery.
It is true that 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 director general of the newly established Jadeja Motwani Institute for American Studies at the OP Jindal Global University.
The views expressed in this article are the writer’s own. — Newsweek
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