Infrastructure

The case for tariff liberalization

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India and the UK’s trade relationship has seen a new dynamism post-Brexit, as the two countries signed the Enhance Trade Partnership (ETP) in February 2021. They have expressed interest in entering into a free trade agreement, and as a first step, there is a strong likelihood that they would enter into an early harvest agreement, where food and drinks would be a key sector for liberalization. It is, therefore, important for both the countries to understand the scope for tariff liberalization and to address each other’s sensitivities and concerns. Given the current uncertainties related to the coronavirus pandemic and the cancellation of the visit of the UK Prime Minister to India on 26 April 2021 (replaced by a virtual summit scheduled on 4 May), there is need for both sides to engage online on a continual basis to address trade issues.

In food and drinks, India had a positive trade balance of $475.30 million with the UK. India’s total food and drink trade to the UK increased from $479.97 million in 2009 to $873.72 million in 2019 (i.e., 82.04%). In 2019, the UK was India’s 12th largest exporting partner (share of 2.16%) and was ranked 17th among the importing partners (share of 1.09%). India was the UK’s 22nd largest exporting partner (0.8% share in value of UK exports) and was ranked 16th among UK’s importing partners (with a 1.2% share). At the same time, much of the bilateral trade potential remains untapped. Given the positive trade balance in favour of India, and the untapped bilateral trade potential on both sides, there is no doubt that food and drinks should be a key sector for liberalization under the early harvest and the future free trade agreement with the UK.

Within the food and drink sector, while India’s export to the UK is more diversified and includes products such as rice, tea, fruits and vegetables, frozen products like prawn, and organic products; over 88% of the UK exports to India in 2019 was ‘Ethyl alcohol, undenatured; of an alcoholic strength by volume of less than 80% volume; spirits, liqueurs and other spirituous beverages’ (HS 2208), which substantially consists of the product more commonly called Scotch Whisky! Within this, the customs tariff rate was 150% in 2019 for Scotch Whisky bottled in the country of origin and for Bulk Scotch Whisky imported for bottling in India. India also imposed a tariff of 150% on intermediate products, namely ‘Undenatured Ethyl alcohol of an alcoholic strength by volume of 80% vol. or higher (HS code 220710), which is used for blending with production in India. This duty reduction in intermediate products will lead to value addition in India and boost ‘Make in India’.

A study conducted by the author on the Indian alcoholic beverage sector found that even if tariffs are reduced, the bulk of consumption in the country would still be locally-produced whisky. The study, based on a survey, found that a number of countries including the UK, US, European Union member states and Australia have raised concerns about the high tariffs on alcohol imports. The UK specifically focused on high tariffs on the Scotch Whisky bottled in the UK and on Bulk Scotch Whisky imported for bottling and blending in India.

Given the concerns of its trading partners, the Union Budget of 2021-22, brought down the basic customs duty (BCD) to 50%, but introduced an Agriculture Infrastructure Development Cess (AIDC) of 100%, which maintained the BCD+AIDC at 150%, the previous tariff levels. While cess of any kind is not generally considered as a duty of Customs, Section 115(1) of the Finance Act 2021 refers to AIDC as a duty of Customs, and hence the UK policymakers can take it up during the discussions with their counterparts in the Indian Commerce Ministry. Tariff rationalization may be perceived as a loss of revenue, but experience in other countries like China has shown that the resultant increase in sales has resulted in a manifold increase in the contribution to the exchequer. As India plans to engage in trade agreements with partners like the UK, EU, US and Australia, it is in India’s interest to draw a roadmap for tariff rationalization.

Tariff rationalization can be carried out in a phased manner so that it does not hurt the domestic industry and helps to develop and improve local production, which can in turn then also be exported. While India is a small exporter of alcoholic beverages, exports are rising and can grow more if there are no restrictions on the cost of intermediate products. Therefore, the tariffs on intermediate products can be immediately brought down to zero at the time of implementation of the Early Harvest to support production and value addition in India. For spirits imported in bulk which are then blended and bottled in India, and spirits bottled in origin (BIO), tariffs can be brought down to zero from the present 50% in a phased manner within 3 years of the implementation of the agreement. In addition, India needs to phase out the AIDC cess of 100% in three years. To safeguard the interest of domestic producers, India may put in a threshold limit or a product price only beyond which the tariff will be reduced. This will ensure that domestic products will not face price competition from imports, once the tariff is zero. Such a tariff rationalization strategy, focusing only on liberalization of premium products and intermediate goods will, on one hand, protect the domestic industry, and on the other, enable India to seek reciprocal market access in products of its export interest, both within food and drinks, and in other sectors like apparel.

Dr. Arpita Mukherjee is a professor at the Indian Council for Research on International Economic Relations

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