To accelerate India's progress towards Atma Nirbhar Bharat, India needs to reduce its tariff and this can happen only by enhancing competitiveness in manufacturing and not by raising tariffs, SBI Ecowrap in its latest research note has said. To explain this, the research note, written by Dr Soumya Kanti Ghosh, said a cross-country comparison of Manufacturing Value Added (MVA) of top manufacturer countries shows that between 2004 and 2017, China gained around 18% market share in manufacturing GVA, while India gained just 1.5. Though India was the second-highest, its share on the global manufacturing stood at 3%, which is the 6th largest.
Other emerging markets viz. Brazil, Indonesia, Turkey, Thailand also increased their share in world manufacturing. But, it was less than 1%. "However, the per capita manufacturing still shows the lack of achievement of India's full potential," the note said. After 2004, India had seen a rapid reduction in AHS Weighted Average (%) across all product categories. "Despite the reduced tariffs, India has one of the highest weighted average tariffs in the world on manufactures," added the note.
A regression of India's imports of raw materials, intermediate goods, capital and consumer goods in the AHS weighted average import tariff rates for 1990-2017 shows that with even 1% increase in tariff, the imports decline $2 billion on an average, SBI Ecowrap stated. This, it said, made a cause for improving the manufacturing base of the country. But, it does not encourage improving productivity and are tantamount to taking the easy route. Also, in the export basket, the highest share is of consumer goods, which are mostly manufactured products, the SBI research note said.
The research note said the high tariffs are clearly impacting India's position in Global Value Chains (GVC). For India, the GVC Participation has slowly increased over the years as the economy opened up and moved towards globalisation. However, the position index has followed a downward trend as the backward linkages have been more pronounced than the forward linkage, it said. "This is perhaps prompting India to raise tariffs but it could actually boomerang on India creating a self-sustaining manufacturing base," the note added.
"This is followed by intermediate goods and these two attract the highest tariffs in the import basket, thus making a case against the fact that the higher import tariffs have not protected these industries," the note said, adding that countries with much lower tariff structures have built manufacturing bases, helping them in exports.
On India's textile and apparel exports to the US, the SBI note said by 2020, US textile and apparel imports have become heavily sourced from China - from 17% share in 2004 to 36.3% in 2016 to 26.9% currently.
Bangladesh and India have gained a comparable market share of around 3%-4% each. But the size of the economies, it translates into bigger gains for Bangladesh vis-a-vis India. "Much more focused attention to apparel and textiles sector is thus required if India wants to compete with its Asian neighbours like Vietnam, Bangladesh and even Cambodia, which surprisingly has shown a positive exports growth rate even in 2020! This can only happen through enhancing competitiveness in manufacturing and not by raising tariffs," it concluded.