The Hindu Business Line : Tariffs: A balancing act ahead

WILL HE, won't he? Whether the Finance Minister, Mr P. Chidambaram, can deliver a Dream Budget yet again, and take the economy to new heights is the question.

While the expectations from the Budget team are high, Mr Chidambaram is in an unenviable position of having to give industry the sops it needs to grow, even while not compromising its revenues too much.

One of the important issues in this Budget will be taking the indirect tax reform one step further. This, while auguring well for domestic production, will go a long way in providing the much-needed thrust to exports.

Faced by the ever-rising input costs, the industry has been clamouring for a reduction in the input tariffs. While this reduction is very much on the cards because of India's commitment to move to an Asean-comparable Customs regime, the Finance Minister will have to consider the impact of this tariff reduction on intra-industry production and trade.

For example, if the tariffs on crude are reduced while those on petro-products are maintained, downstream companies will face higher protection levels vis-à-vis the upstream ones, with various spin-offs on oil investment, petro-trade and profit margins.

The tariff reduction will have to be done selectively in such a way that distortion is minimum, without compromising revenue collection. One of the major tasks of Budget-making is, therefore, identifying industries that need a special thrust. This problem is normally tackled by talking to export councils and looking at the demands that exporters bring to the table.

However, there could be a more convenient, if unconventional, way of looking at the problem. An emerging trade dynamic in India is the resort of the industry to Non-Tariff Barriers (NTBs) for buying increased protection.

The public perception is that after phasing out Quantitative Restrictions, the trade now is not subject to NTBs. But we seem to be using a particular type of an NTB: Anti-Dumping (AD) litigation. What is dumping?

If a company sells its produce abroad at a price lower than the "normal value" of the good, and if this action causes a material or potential injury in terms of profits or market share to the domestic industry producing that product or a "like product", then the Anti-Dumping Agreement of the WTO permits the target country to levy an AD duty on the product concerned. Because of hazy definitional content and tedious procedural requirement, there is a fairly high probability of dumping being proved.

From being a non-entity in the AD legislation in early 1990s, India has become one of the frequent users of the instrument post-1996. By 2002, a mind-boggling 285 cases were initiated by India, whereas it was blamed for dumping in 118 instances.

If there are 285 instances where domestic industry has been demanding protection, there must be issues therein that need policy intervention.

The Finance Minister would do well to examine the ailments of the industries that have sought higher protection through NTBs. Of course, there will be some who have simply used the litigation as a protectionist device. But selective tariff reduction needs adequate identification of problem areas and this could be one sensible starting point. Given the barriers AD litigation has raised worldwide, reform of the AD agreement is round the corner.

Rather than wait for that to happen, the time till the change takes place has to be treated as the period in which industry problems have to be addressed.

The good to great step requires making the most of this breather we have got and delivering sops only to those who need them, considering the enormity of the opportunity costs involved.

(The author is a professor, Knowledge Services, Symbiosis Institute of Business Management, Pune.)

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