Even though India has been trying to simplify taxation, various complications have nullified some of the gains made by these efforts. An example of this is the persistence of inverted fee structures in some business sectors. Broadly speaking, the term refers to instances where inputs are taxed at higher rates than the final product. In domestic manufacturing, with a levy imposed on value added at each stage of production, this can increase a manufacturer’s tax burden long before sales are realised; And in acute cases of rate inversion, capital locked up waiting for a refund can become irritable. But it is on the trade front that such odd rate structures reveal their worst effects. Here, higher import duties on intermediate goods than on finished goods are a deterrent to investment in local plants, especially if they must fit into global supply networks, which typically consist of various bits and pieces made across borders and Specially low tariffs are required on inputs. The ultimate competitive edge in global markets. Against this backdrop, there are indications that India’s finance ministry plans to fix duty inversion in the next budget. What exactly is done will matter, of course.
As the overarching objective should be to help the global competitiveness of all made in India, reforms should focus on reducing input tariffs rather than raising final product barriers. While the former lowers a manufacturer’s cost base, the latter provides protection from import competition, a policy tool that can turn a sector to be oriented inward rather than outward, as we have seen with our closed economies. seen in days. As it happens, India’s average import tariffs have been falling for more than half a decade, a trend that signals imports, coupled with the 2020 self-reliance slogan, are now being phased out. As the landscape varies from region to region, and various free-trade agreements have complex rate gaps, a broad-sweep reduction of duties suggests itself as the best way to minimize inversion. In any case, the dissonance on trade policy should be resolved soon, as there is a need for India to grab the China-plus-one opportunity, attract global supply-chain diversification and position the country as a manufacturing hub. Time is running out. In general, for our exports to flourish, we should not put any unnecessary burden on the domestic units which would blunt their edge in the global markets.
The divestment must proceed with clarity on our best interests from the point of view of the business as a whole. A higher than expected oil import bill affected our trade balance this financial year. In the second quarter of 2022-23, India’s current account deficit is set to reach 4.4% of GDP, a nine-year high. Although energy prices have come down from last year’s war-driven highs, we are now seeing weak demand overseas amid a global slowdown in economic growth. While exports may face headwinds in 2023-24, conditions are also ripe for India to act as a ‘buddy’ to multinationals, who are looking to ‘friend’ or spread their operations. Looking to hedge supply side risk. The less policy distorts trade, the more attractive a country will be, because ‘policy risk’ will not frustrate us in factory-location calculations. The Budget for 2023-24 should not only revise the tariff but also spell out the changes clearly. Tweaks shouldn’t be buried in a maze of official documents, which require looking in other contexts. Instead, they should be easy to understand. And it should also give a measure of coherence to the country’s embrace of globalization to boost exports for the fast-growing economy.
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