India Inc Losing Its Protective Armour, Slowly

In spite of the finance minister committing himself to slashing the peak customs duty from the existing 30 per cent to 20 per cent by 2004-05, India Inc will continue to enjoy higher protection than several countries like China, Thailand, The Philippines and Indonesia.

With a 30 per cent peak customs rate and a four per cent special additional duty and a 16 per cent countervailing duty, an importer today has to pay a total tariff of 47.2 per cent. In comparision, an Indian producer of the same product has to pay an excise duty of 16 per cent (in the budget, the excise duty on all products except eight items has been set at 16 per cent). The protection, therefore, works out to 31.2 per cent. With the peak customs duty being cut to 20 per cent by 2004-05, the protection will fall to 20.8 per cent.

However, this is higher than the protection of 10-15 per cent currently provided to companies in the East Asian region. Foreign trade experts feel that in the next two years, this rate may only decline further making the Indian protection look even higher. For Chinese companies too, the protection rate is around 18 per cent.

The effective protection rate in the US is 3-4 per cent, while in the European Union, it is 5-6 per cent.

On its part, industry feels that the protection rate is justified on account of the high cost of doing business in India. To begin with, the cost of capital is much higher in India than abroad in spite of the rate of inflation in the country being very low. Two, the prices of critical inputs like power in India are much higher than the prices prevailing in other countries. Three, it is also being felt that services in India are not as efficient in India as in foreign countries which calls for higger protection to the Indian companies.

The cut in the peak rate of customs duty started in 1997-98 when the then finance minister, P Chidambram, had talked about reducing the rate down to the level prevailing in ASEAN countries. The protection for Indian companies has been dipping regularly in the last few years.