The Department of Industrial Policy & Promotion (DIPP) is analysing the extent to which India’s free trade agreements with Japan, South Korea and the Asean have distorted the import duty structure and how it could be corrected.

India Inc has asked the Government to address the inverted duty structure — under which import duties on finished products are higher than duties on inputs — in the forthcoming Budget.

An inverted duty structure encourages import of finished products and discourages value-added manufacturing, industry argues.

“While this year’s Budget could make some changes in the import duty structure to correct some inversion, it has to be an on-going exercise because the issue is complex,” an official from the DIPP said.

The DIPP has asked the Commerce Department for inputs which, officials say, could take some time.

Duties on raw materials “Since it is not possible for India to increase import duties on finished products because it has made a commitment to its FTA partners to keep those at low levels, the only way in which inversion can be addressed is by lowering duties on raw materials,” a Commerce Department official said.

India has signed FTAs with Japan, South Korea and the 10-member Asean countries over the last two years under which it has committed to bring down tariffs substantially on most manufactured goods.

Nine sectors According to a survey carried out by industry body FICCI, about nine manufacturing sectors have reported duty inversion, which include aluminium products, capital goods, cement, chemicals, electronics, paper, steel, textiles and tyres.

A detailed study on the effect of duty reduction on a particular product and associated sectors will need to be done before deciding on any duty correction, the official added.

“For instance, although the import duty on rubber is much higher than that on tyre, bringing it down could have a devastating effect on rubber growers,” the official explained.

Moreover, a particular input may be used to manufacture a number of items and while bringing down import duties on that input could be favourable for one sector, it may not be for another.

Correcting the inverted duty structure is part of the newly elected BJP-led Government’s effort to boost the manufacturing sector which has been doing poorly.

In the last fiscal, manufacturing contracted 0.8 per cent compared with 1.3 per cent growth in the year before.