India can initiate a lot of “rationalisation” of its tariff regime to help it take a more proactive role in the World Trade Organization (WTO), despite the one-too-favourable global situation. This exercise aims to reduce its average Most- Favoured-Nation Treatment (MFN) “applied” tariffs substantially and withdraw most export promotion schemes. Even in the WTO negotiations, New Delhi can achieve major gains by even lowering “bound” rates of tariffs, even if it were not up to the applied rates, suggests a comprehensive paper prepared by the economic division of the Union Finance Ministry.
According to IMF’s World Economic Outlook update, January 2017, world trade (goods and services) volume growth is projected at 4.1 per cent for 2018, better than the 3.8 per cent anticipated for 2017. In respect of textiles India has big stakes in the US and the EU, two big markets while there is recovery in the US, the major problem for India is from Europe where conditions continue to be subdued. India has the second largest textile manufacturing capacity globally with the textiles and apparel sector contributing 13.7 per cent of the country’s export earnings in 2015-16. The textiles trade has been showing a declining trend in recent years.
Most export promotion schemes have an element of subsidy, an issue on which Washington has dragged New Delhi in the WTO recently. A panel has been set-up under WTO auspices ad is due to give its verdict in the next few days after hearing both the parties. The current situation, world-wide, has had the effect of slowing down or breaking up of Mega Free Trade Agreements (FTAs), the latest being the US withdrawal from the Trans Pacific Partnership (TPP), consisting of 12 countries. The other contributing factors are Britain’s exit from the 28-member European bloc, rising protectionist measures, slowdown in global growth ad trade and increasing anti-globalization sentiments even in developed countries.
For India, it is a blessing disguise as it is not part of any major/mega FTAs and their growth could have harmed our interest. Experience shows that India’s FTAs have benefited its trading partners more than us, though some of them are for “strategic” reasons as for instance the FTA with Bangladesh, a least developed country (LDC). Also, the benefits of EU’s Generalised Scheme of Preferences (GSP) have been withdrawn for India though they have been made eligible for its competitors in important sectors as for instance Pakistan for textiles and clothing.
In this situation, the first best option for New Delhi as said earlier is fundamental reforms in the tariffs sector. The second best option is forging useful FTAs with some major countries such as the United Kingdom (UK), and the EU. While a comprehensive Trade and Investment Agreement with the EU has been delayed, New Delhi should initiate talks to conclude an FTA with the UK and implement it quickly, while pursuing the India-EU FTA further.
Other new FTAS which could be beneficial for India are with Latin America and African countries. Australia and New Zealand can help engineering and automobile exports in particular. The India- EU FTA can help India which has been affected by the withdrawal of GSP benefits by the EU. For instance, many items in the chemicals sector have become uncompetitive as Indian exports face the incidence of full customs duty (around 3.8 per cent). Further, anti-dumping duty of around 8-9 per cent is imposed by the EU on imports of fatty alcohols entry in the EU. These issues need to be taken up while finalizing FTAs with the UK and the EU.
There are opportunities for exports of textiles to the UK, after Brexit, as the UK is an important market for this product. Out of the total cotton textiles imported into the EU, 61 per cent is accounted for by the for by the UK alone. Further, about 55 per cent of India’s total exports of cotton textiles to the EU are destined to the UK. Also, 25 per cent of India’s exports of textiles and clothing to the EU go to the UK. And any preferential arrangement with the UK could help India.
Among the prospective countries for new FTAs are Canada and Australia as the tariffs for garments/made-ups in these countries are 17.5 per cent and in the case of Australia, China has initialed an FTA. As stated earlier, the mega FTAs “erode” existing preferences for India’s products in established traditional markets benefiting the partners to these agreements. These FTAs include, besides TPP, Asian Economic Community (AEC), the proposed Trans Atlantic Trade and Investment Partnership (TTIP) between the US and the EU and are considered as new challenges for India in merchandise trade and service trade. The US withdrawal from TPP could help China expand its interest in the Regional Comprehensive Economic Partnership (RECP) Agreement route and India could benefit from RECP only if it is carefully negotiated.
The paper “Reviving and Accelerating India’s Exports” by Dr. HAC Prasad delineates the reasons for rationalizing the tariff regime. It notes that India’ average MFN applied tariffs are relatively higher than these of other emerging economies, other than BRICs (Brazil, Russia, India and China) economies except Brazil and India’ bound tariffs are higher than all these countries. However, India’s average applied tariffs on non-agricultural (manufacturing) items at 10.1 per cent are relatively lower than its applied total tariffs at 13.4 per cent in 2015 (WTO data)/ 16.1 per cent in 2015-16 (customs tariff data). But “realized” tariffs after taking into account all exemptions based customs collections is very low at only 2.8 per cent while realised total tariff collections are at 8.7 per cent in 2015-16. It was 2.3 per cent and 6.5 per cent respectively in 2014-15. The slightly higher rate is due to higher collection rates under budget heads. For agricultural and nonagricultural items, total realised tariffs are 9.6 per cent and 2.5 per cent whereas applied tariffs are 32.7 per cent and 10.1 per cent respectively in 2015.
Further, India’s realised tariffs are very low and even lower than applied tariffs of many Asian countries. Since refunds and drawbacks are mainly in non-agricultural sector, the realised non-agricultural tariffs would also be lower. This is due to large duty concessions and exemptions given under the Foreign Trade Policy. Most of these are in sectors like machinery which could be due to the EPCG scheme. With GST, many of other duties (other than basic customs duty will get input tax credit. Thus, only duty drawback at a reduced rate to cover the reduced BCD would be needed. Sectorally, there is scope to lower duties for some sensitive items. This will impact India’s FTAs/ Preferential Agreements which have been negotiated. There is scope for better negotiation of new ones.
