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HVK Archives: Season for rethink

Season for rethink - The Financial Express

Editorial ()
March 19, 1998

Title: Season for rethink
Author: Editorial
Publication: The Financial Express
Date: March 19, 1998

Business expectations that the BJP-led coalition government will
revise import duty rates have also created fears in certain
circles that this will mean a reversal of reform. The
apprehension is incorrect, and is based on the dogma that import
duty reduction per se is what the Indian economy needs. It is
time to review the Chidambaram strategy which hit hard heavy
industry, capital goods and intermediates through a sharp
reduction in import duties to zero-20 per cent. It is nobody's
case that import duties for the core sector should be raised to
the high heavens. The issue is, can these industries face import
competition at the drastically lowered duty rates? This needs to
be addressed by calculating the inherent disadvantage faced by
domestic industry The Raja Chelliah committee did precisely that
(but Chidambaram gave it the short shrift). Consider just one
disadvantage: the high cost of power (a key input) which at ten
cents a unit is double the international cost. The Chelliah panel
therefore argued that no import duty should be below 20 per cent.
Historically, import duties have a pyramidical structure: low
(raw materials), high (intermediates) and very high (finished
goods). The Chelliah panel wanted the band between low and very
high to be contained at 10 percentage points, so that protection
is confined to value addition in the finished category. This
would prod domestic investment to move into higher value-added
areas with competitive advantage. Import duties need to beraised
to the 20-30 per cent band, keeping the average duty rate around
the current 22 percent. This will hardly negate reform. Sure
enough, protection will be enhanced, but that is precisely what
import duties are all about. Furthermore, there is the issue of
high interest rates. In a capital short economy, interest rates
will be high. Local firms are consequently at a disadvantage so
far as the cost of capital is concerned. Nothing can be done
about this drawback, but it can be neutralised via protective

Nor is there any reason for the government to be on the defensive
in arguing for a playing field tilted in favour of domestic
industry. The argument in favour of protection does not rest
merely on the basis that they are needed to neutralise the
disadvantages under which local companies operate. A regime of
calibrated protection is necessary to enable domestic industry to
attain the capacity and the technology needed to compete in the
world market-history shows that such protection has been a
feature of all countries at the developing stage, including the
USA. There is absolutely no need to run ahead of the WTO so far
as tariff reduction is concerned. If this is construed to be
antireform, then it is time to reform the reform process.

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