Is India a high tariff economy?

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India is widely known as a country with high import tariffs. This view, however, may look fallacious. Changing this view is important for several reasons, both within India and outside. World Trade Organization estimates of India’s applied most favoured nation (MFN) tariffs, i.e. tariffs applicable in general, are 13.4% (simple average) and 7% (trade-weighted average). The World Bank reports that India’s applied average tariffs were 6.3%, significantly higher than those for low tariff economies. The corresponding estimates are 1.8% for both Australia and Chile, and 1.6% for the United States. This apparent difference between these countries and India, however, may look inaccurate.

A simple way to evaluate India’s trade-weighted applied tariffs is to incorporate the percentage ratio of customs revenue to imports. The usual estimates using this method for India have ranged between 6.3% and 8.4% for the past three years, close to the applied or trade-weighted average tariffs calculated by the World Bank and the WTO. However, the actual estimate of applied tariff is provided not by total customs revenue, which for India includes a refundable component imposed on imports in lieu of the domestic excise tax. The correct basis is the “total basic customs revenue” which shows revenues from tariffs without any other extraneous revenue item added to it. Estimates using basic customs revenue show that the applied average tariff of India in the last three years ranged between 1.7% and 2.3%, similar to the average tariff estimates for economies considered relatively open in terms of tariffs. Thus, it could be articulated that India too is a low tariff economy.

The large difference between India’s actual average tariffs and its MFN trade-weighted applied average tariffs arises inter alia due to the several exemptions and concessions that the country provides on its MFN tariffs. Despite these concessions, people in general continue to think of India as a high tariff economy. This suggests a need as well as a possibility for tariff policy reform to simplify and bring transparency in the tariff regime, and enable users to more easily understand the actual tariff paid. These changes would help investors and others at home and abroad, including investment initiatives under programmes such as “Make in India”.

An imperative point we still need to address is that since higher tariffs disincentives imports, the trade-weighted average is inherently downward biased. It is argued that if the prevailing high tariffs are reduced, then the increase in imports would raise the average trade-weighted tariff. Let us elaborate this aspect for India. For that, we first need to separately consider agriculture and non-agriculture products. Trade policy for agriculture is always treated differently across most countries. For example, even for the United States, the 10 agriculture categories according to the WTO have maximum tariffs ranging between 18% and 350%. Maximum tariffs for four of these categories are above 130%, and between 44% and 55% for most others. The situation with non-agriculture tariffs is different, and even in trade negotiations, greater focus on market opening is given to non-agriculture products.

Many of India’s bound tariff rates on agricultural products are among the highest in the world, ranging from 100 percent to 300 percent. While many Indian applied tariff rates are lower (averaging 32.7 percent on agricultural goods), they still present a significant barrier to trade in agricultural goods and processed foods (e.g., potatoes, apples, grapes, canned peaches, chocolate, cookies, and frozen French fries and other prepared foods used in quick-service restaurants). The large gap between bound and applied tariff rates in the agriculture sector allows India to use tariff policy to make frequent adjustments to the level of protection provided to domestic producers, creating uncertainty for importers and exporters. Thus, the high tariffs on agriculture is a mulling matter, but this area is treated differently in trade policy and negotiations as mentioned. Anyways, the above-mentioned low average tariffs of 1.7% to 2.3% include all products, agriculture and non-agriculture.

A perception of India as a low tariff economy would prepare a basis for domestic tariff policy reform and will benefit in changing the perspective of Indian trade negotiators in their interaction with other nations. This could also provide them a healthier basis to develop negotiating strategies for seeking greater market access for Indian exports to markets abroad. Moreover, policy makers will have more flexibility than erstwhile considered feasible to evolve a revised tariff policy. Further, if tariff policy has to be combined with new industrial policy, as is now a tendency in various economies, it is better to do so with transparent tariffs that fit into a consistent policy outlook.