February 13th, 2023

Shri Sanjay Malhotra

Revenue Secretary
Government of India, Department of Revenue
128 A, North Block
New Delhi - 110 001

Subject- Request for Reduction of Import Tariffs and Import Duties to Enhance
Competitiveness of Indian Exports

Dear Mr. Malhotra,

I am writing to you today to express my thoughts on the importance of reducing tariffs and
import duties in India to support the growth of exports and enhance competitiveness.
As you are aware, India is a rapidly developing economy with a large and diverse range of
industries, many of which have significant export potential. However, high tariffs and import
duties can pose a major obstacle to the competitiveness of these industries, particularly in an
increasingly globalized and interconnected market.
I believe that reducing import tariffs and import duties would have a significant positive impact
on India's exports. By lowering the cost of inputs, exports would become more competitive in
foreign markets, increasing demand for Indian goods and services. This, in turn, would
contribute to the growth of exports and help to boost the Indian economy.
Moreover, lower tariffs and import duties would also improve market access for Indian exports,
attracting foreign investment and supporting the expansion of existing export-oriented
industries. It would also create a more favourable environment for the development of new
industries, further enhancing the competitiveness of Indian exports.
In conclusion, I strongly believe that reducing import tariffs and import duties is essential to
support the growth of exports and enhance competitiveness in India. I am submitting a policy
advocacy note regarding the same attached to this letter as an annexure.
I look forward engaging with you on this issue. I will be happy to provide clarifications and
additional information if required.
Thank you for your time and consideration.
Sincerely,
Mukul Anand
 ANNEXURE

Exports play a critical role in the growth and development of a country's economy. They

contribute to Job creation by exporting goods and services, creates jobs in various industries,

including agriculture, manufacturing, and service sectors. A nation can earn foreign currency

and increase its overall revenue by selling goods and services to other countries. It helps to

drive economic growth by increasing demand for a country's goods and services, leading to

increased production and investments. Further, by exporting, countries can compete in the

global market, helping to improve their competitiveness and innovation. The positive effects

of engaging in international trade, thus, have been evident since World War II. Japan, South

Korea, China, Thailand, and Malaysia, are all examples of economies where exports have

played a crucial role in the economic transformation. Southeast Asia has emerged as a major

global production and trade center, and exports have been a critical driver of this

transformation.

It was recognised early on that all materials needed for production may not necessarily be the

cheapest in domestic markets, and so several Southeast Asian countries put in place liberal

trade regimes for imported inputs. India, till the early 1990s, was a relatively closed economy.

In 1991, the country embarked on a series of significant trade reforms, progressively cutting

tariff- and non-tariff barriers, phasing out quantitative restrictions, and easing limitations on

the entry of foreign investment. Even though India is still considered a highly protected

economy, progressive liberalization has produced remarkable results. However, compared to

China, which increased exports to World almost 14 times in the last three decades, India's

export share in World exports remained flat after a slight improvement in the 1990s and 2000s,

i.e., after the economic reforms, including trade reforms.

An economy can raise its exports, in one way, by importing foreign inputs to produce goods

and services meant for exports. This helps an economy to calibrate with Global value chains

(GVCs), which refer to the interconnected network of production activities stretching across

multiple countries that are involved in creating and delivering goods and services to global

markets. Thus, imports play a crucial role in raising exports. As per a recent report by EXIM,

India's average tariff has remained very high in the years between 2007 to 2017 across several

methods of measuring tariffs (simple average MFN tariff, simple and trade weighted average

tariffs, etc.). Intermediate goods form a large proportion of our imports at 32%. At the same

time, almost 70% of all anti-dumping duties are levied on intermediate goods. In an

environment where an economy's participation in the world economy is an outcome of a series

of activities that occur within a GVC, high tariffs can have a cascading effect on the pricing of

downstream industries.

The complexity and interconnectedness of GVCs can amplify the impact of tariffs on trade and

activity in several ways, such as:

1. Complex supply chains: GVCs often involve complex chains that span multiple

countries, with intermediate goods and components traded multiple times before

reaching the final consumer. This means that tariffs imposed on one stage of the supply

chain can have a cascading effect on the overall price of the final product, which can

affect both exports and imports.

2. Fragmentation of production: GVCs often involves the fragmentation of production

processes, with different stages of production taking place in different countries. This

means that tariffs imposed on one step of the production process can affect the

competitiveness of the final product in foreign markets, which can impact exports.
 3. Dependence on imported inputs: Many GVCs depend on imported inputs, such as raw

materials, components, and semi-finished goods. Tariffs imposed on these inputs can

increase the cost of production, making the final product less competitive in foreign

markets and reducing exports.

4. Re-routing of trade: Tariffs can encourage the re-routing of trade, as companies seek to

avoid paying tariffs by sourcing inputs from countries that are not subject to tariffs.

This can have a significant impact on trade flows, as well as on the competitiveness of

countries that are subject to tariffs.

5. Uncertainty: Tariffs can create uncertainty in GVCs, as companies are faced with the

possibility of changing trade policies and the potential for additional tariffs. This

uncertainty can discourage investment and reduce the competitiveness of GVCs,

leading to a decline in exports and economic activity.

Therefore, Global value chains (GVCs) and exports are closely related in the sense that exports

are a critical aspect of participating in GVCs. Exports are the final outcome of a series of

activities within a GVC, representing the delivery of goods and services to foreign markets.

For a country to participate in a GVC, it must be able to export its goods and services effectively

and efficiently. Exports are the means by which a country can access foreign markets,

participate in the global economy, and benefit from the opportunities offered by GVCs. A

country's participation in a GVC can enhance its competitiveness, increase its productivity, and

lead to economic growth.

According to the aforementioned justifications, India shouldn't raise taxes on intermediate

products. This is so because products imported into India may be used to produce goods for

export. Any increase in the price of these goods drives up manufacturing costs and restricts our

ability to export. By increasing the price of these essential inputs, we further erode our
competitiveness, which is already hampered by the high cost of logistics, credit, and power.

The experience of India's South Asian counterparts illustrates that imports and exports grow

hand in hand. We can understand this from our experience also. The Indian Automobile

industry, for example, imports USD 6.1 billion worth of auto components but exports $18

billion worth of products by utilising those imports.

This also applies on a more general level. For instance, our trade-to-GDP ratio increased from

26% to 49% between 2001 and 2010. During this time, imports and exports both increased.

Both imports and exports rose nominally at rates around 20% over this decade. A study of

China's experience reveals that imports and exports are expanding at comparable rates. In-

depth research has shown that over half of China's imports were made up of intermediate items,

which helped the country's exports grow. It's important to remember that for such intermediary

goods, a liberal import system was applied, allowing duty-free imports.

This calls for an analysis of India's Tariff framework. Although India is seen as a high-tariff

country, the effective tariffs taking into account India's preferential tariffs to different countries

fall lower than the 10% bracket (simple average Effective tariffs at 8.7% and weighted average

Effective tariffs at 4.9% in 2018 as per TRAINS data). Thus, there is a need to address the

wrong perspective being built. Also, it should be well communicated that revenue collected

from the variety of import tariffs is forgone in the form of exemptions.

At the same time, claiming these exemptions is a drill. India's total import duties include BCD,

IGST, and SWS. In most non-agricultural items, total import duties charged are double or more

than double the BCD. There is no refund or input credit for SWS. But even when it is available

for IGST, there are problems claiming ITC. So, there is a need to make IGST less protective

and remove SWS on imports to reduce the level of total duties. The rationalisation process

should also eliminate as many non-ad valorem tariffs as feasible, reduce the number of tariff
rates by combining some of them, and resolve any remaining instances of inverted duty

structures. It's essential to take care of sensitive products, especially those in the agriculture

sector.

Additionally, tariffs and tariff rates can be decreased, especially in the non-agricultural sector.

The total number of tariff lines in the agricultural sector, industrial sector, and overall will be

95.4%, 23.0%, and 31.8% if we omit products with a 10% tariff rate and only take the items at

a rate over 10%. Their import proportions will be 25.2% overall, 86.4% in the non-agricultural

sector, and 22.7% in the agricultural sector (Table 1). As a result, there are many non-

agricultural tariff lines (38.3%), which account for a significant portion of imports (23.7%),

which are also at the 10% threshold. India has earned the reputation of being a high-tariff

economy due to the products with tariff rates over 10%. Therefore, these Tariff lines must be

investigated for rationalisation in terms of tariff level.

Table 1: Tariff Rates 10%, >= 10% and > 10%: Share of Number of Tariff Lines and
Imports in 2018-19

Source: “Relooking India’s Tariff Framework- Executive Summary” by the Export-Import Bank of India
(EXIM Bank) in collaboration with Dr. H.A.C. Prasad (based on data extracted from Custada.in for tariff
data and DoC for import data), 2020, p.24
Embedded within this appeal to reduce tariffs is the idea is to promoting our domestic

manufacturing industry to spur exports and economic growth. The government has already

taken several important policy steps in this regard over the past few years. First, the decision

to reduce the corporation tax rate to 15% for new manufacturing businesses and 22% for other

businesses will support domestic manufacturing. In a first for India, production is being

incentivized rather than inputs with the implementation of the Production-Linked Incentive

(PLI) programmes in numerous vital industries. These programmes will aid in the growth and

scale of domestic manufacturing. The Central Labour Laws were streamlined into four codes

from as many as 29 laws. The definitions of MSMEs have been raised upwards, allowing them

to grow in size while maintaining the benefits of MSMEs. All of these actions should aid

domestic industry's growth and scope.

Although several parameters impact exports and imports, this note focuses primarily on the

role of tariffs. This note advocates for lower tariffs and import duties as that would improve

market access for Indian exports, attract foreign investment and support the expansion of

existing export-oriented industries. It would also create a more favourable environment for

developing new industries, further enhancing the competitiveness of Indian exports. The global

headwinds resulting from the US-China trade war, the Russian-Ukraine war, Brexit, the

growing need for private capital to diversify risks, etc., have positioned India favourably. The

present time is an excellent opportunity for India to integrate itself into GVCs and cannot be

allowed to pass. Reducing tariffs and import duties is essential to support the growth of exports

since they can power the Indian growth story for the foreseeable future.