The Indian trade regime

Despite attempts to liberalize India's import trade regime, the structure of import licensing is still restrictive and complex and for most products, trade restrictions are probably redundant as protection. Reforming export policies alone - without reforming India's import and tax systems - will produce only marginal improvements. Problems in the export administration can be resolved only by making changes in four areas. (1) The import licensing system must be rationalizedto eliminate import restrictions on inputs and components. The import regime inflicts heavy administrative costs on the Indian economy. Imports of raw materials and other inputs essential for production are delayed, leaving downstream producers idle when domestic supplies are interrupted (which happens often). The export regime is still not rationalized for smaller producers, indirect exporters, and firms that rely on domestic suppliers. (2) Tariffs and excise taxes must be consolidated around two to three slabs and the quantitative restrictions in intermediate and capital goods must be eliminated so firms can be compensated accurately for their tax burdens. The system that exists is far two complex. (3) The absolute level of tariffs on inputs must be reduced to administer the duty-free import schemes efficiently. High tariffs encourage leakage of duty-free imports into the domestic market and abuse of high drawback rates (incentives). (4) Tariffs and taxes on capital goods must be reduced to reduce the costs of investment. Tariffs in India - especially on key intermediate products (metals and chemicals) and capital goods - are high and getting higher fast. The high cost of basic inputs increases the cost of production, leads to uneconomic import-substitution which causes pressure for more protection, and requires an elaborate, cumbersome system to compensate exporters. High tariffs and excise taxes on capital goods damage Indian competitiveness, adding 10 to 15 percent to the cost of production and severely handicapping exporters. The excessive tariffs do not fulfill their primary purpose of providing protection and incentives; they are aimed at mainly generating revenues. Public revenues should be generated through more efficient instruments especially taxes.