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INDIA
BUSINESS WORLD -
JANUARY 2006
THE MONTH THAT WAS
PEAK CUSTOMS DUTY LIKELY TO BE CUT BY ONLY 2-3%
The finance ministry may lower the peak customs duty by only 2-3% in the Budget to protect the domestic industry from foreign competition. This is against the widely-held belief that finance minister P Chidambaram may cut the peak duty by 5% to bring tariffs closer to Asean rates. Last year, the finance ministry had lowered the peak customs duty to 15% effecting a 5% cut. There's more in store for domestic industry. The FM is expected to correct inverted duty structure by taxing inputs and raw materials at lower rates than finished goods.
A 5% cut in peak duties from the existing 15% would translate into a 33% drop in protection. In contrast, a 2-3% cut would work out to a 13-20% drop in protection for domestic industry against competition from imported goods.
The government is committed to reducing tariffs to Asean levels in the next 2-3 years. PM Manmohan Singh recently assured the Asean Business Advisory Council that his government was committed to dismantling unwanted barriers, including high import tariffs. Similar statements have also been made by Mr Chidambaram.
The government is also adopting a gradual approach to duty cuts to strengthen India 's bargaining position at the next round of World Trade Organisation (WTO) talks. India is negotiating steep cuts in bound duties under non-agriculture market access (NAMA) at WTO. At this stage, any unilateral steep cut could reduce India 's bargaining power.
Mr Chidambaram may spell out targets for customs duty reduction and present a roadmap for converging customs duties to Asean levels. This has demanded by industry leaders in their prebudget meeting early this month.
Ministry officials say they are undertaking a painstaking exercise to identify products and commodities affected by the inverted duty structure, particularly, after the free trade agreement (FTA) with Thailand was signed. Many companies, particularly MNCs with production facilities in South East Asia , have announced intentions to shift manufacturing to Thailand from India to take advantage of the lower tariffs under the FTA.
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