Is India a 'tariff king'? Not really

THERE is a widespread but fallacious perception that India’s tariffs are inordinately high.

- By Mohan Kumar

There are subjective factors when it comes to a country like liveability, 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.

Two kinds of tariffs

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-favoured-nation (MFN) commitments to the WTO.