Op-ed: Is India a ‘Tariff King’? Not Really
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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?