The Hindu Business Line : ‘FTA tariff cuts for industrial products can be avoided’

New Delhi, Nov 11 An official committee on inverted duty structure has held that duty exemption granted under free trade agreements (FTAs) on industrial products could be avoided and, where it is not, it should be ensured that the whole chain of products in which the exempted product is the key input are also kept out.

In its comprehensive study on inverted duty structure where the import duty on raw material is far higher than the import duty on finished products, the Anwarul Hoda Committee has said that when FTAs are negotiated the industry needs time to adjust to new conditions of competition, official sources told Business Line here, adding that the Commerce Ministry is in full agreement with the views of the Hoda Committee. The sources said the Ministry has responded to the Committee’s recommendations.

Phase-out plan

The Committee has said that during the adjustment period the industry must decide whether it should rationalise and become competitive or, where inevitable, even change its line of manufacture. It said that the phase-out plan of duty elimination should extend over seven to 10 years, an exception for a longer time-frame being made for deserving case where a longer span of adjustment is deemed necessary.

With the early harvest scheme (EHS) on 82 products under India-Thailand Free Trade Agreement having hurt domestic industry sorely in some key segments of manufacturing, the sources said the Committee has pertinently pointed out that EHS, which has provided only three to four years for reduction of duty from 20 per cent to zero have proved “harsh for the industry”.

When contacted about the Committee’s recommendations, the Minister of State for Commerce, Mr Jairam Ramesh, said, “We have to rectify the anomaly of inverted duty structure in order to promote labour-intensive manufacturing in the country. There are far too many instances where the import duty on raw materials is far higher than the import duty on finished products, rendering total manufacturing untenable”.

Comprehensive FTAs

Stating that there is a qualitative difference between FTAs formed with partners with diversified economies and those with small economies with a narrow industrial base, the Committee said that in the case of the former it is possible to have access within the FTA to a wider range of intermediate products and raw materials.

This is not so in the case of smaller economies where the intermediate product or raw material is not available domestically and they have to be obtained from most-favoured nation (MFN) sources after paying higher duty as applicable.

Eventually, the Committee noted that there should be no let-up in autonomous liberalisation of tariffs on MFN basis, as this would not only mitigate inverted duty structure but also minimise trade diversion, both of which are inherent in FTAs. Hence it contends that as far as possible the FTAs should be comprehensive in the coverage of products.

In order to bring balance among the conflicting objectives such as evidence of adverse effect on the industry, need for protection of the industry producing the related input and loss of revenue to be triggered by the duty cut on the input, the Committee suggested a spate of mitigation measures. These include, among others, negotiations for imposition of tariff rate quota (TRQ), inclusion of intermediate product in the limited list under EHS, reduction of MFN duty on intermediate products or raw materials and tightening of procedures on duty-free imports under end-use exemption, the sources added.

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