India is one of the most protected markets in the world. However, it is also one of the markets that is most reliant on open relations with its trading partners. Characterised by high tariffs and stringent regulatory barriers, Delhi has been in an aggressive dealmaking mood of late.
India’s simple average applied tariff — the sum of tariff lines divided by the number of tariffs in the schedule — grew from 13% in 2014 to 14.3% by 2021. This compared to 8.5% in the Southern Africa Customs Union (Sacu), or just over 6% in the case of Mexico.
It is a notable development that India’s dealmaking with the EU and US, in a context of fractious geopolitics, has offered an example to middle powers in declining multilateralism. The lesson? Dexterity trumps dogma.
It is not only in the decades-long negotiations with the superpowers where such dexterity has been on display, but also in the annual calibration of indirect taxes (in particular tariffs) found in the February budget. It is a matter of bipartisan (BJP and Congress) practice in Indian politics for the indirect tax section of the annual budget to provide industrial policy signals.
Auto industry concessions
Take for instance the last budget, delivered by an Indian National Congress finance minister, P Chidambaram, in 2013. That budget included a proposal “to extend the period of concessions (importation duty free) for specific parts of electric and hybrid vehicles”, and the “[imposition] of a duty of 10% on (the) export of unprocessed ilmenite (titanium)” as “prices of unprocessed ilmenite have gone up several fold in the export market”.
Chidambaram further observed “there is an affluent class in India that consumes imported luxury goods such as high-end motor vehicles, motorcycles and yachts”. In response, he proposed an increase in the duty on such vehicles from 75% to 100%.
A similar observation can be made of industrial policy signals, from minister Nirmala Sitharaman of the BJP. Delivering the budget last week, she highlighted the Delhi government’s tax proposals aimed not only to simplify the tariff structure, but also to support domestic manufacturing, promote export competitiveness and ensure “the correct inversion in duty”.
This idea of the inversion of duties not only highlights the reliance of the Indian manufactured export basket on imported materials, knowledge and know-how, it is also indicative of why the latest round of dealmaking is important for Delhi. Without receptive destination markets for its finished exports or favourable terms of access to intermediate inputs it cannot make at home, the entire export performance of the Indian economy is jeopardised.
South Africa is seemingly following suit, with proposed amendments to the auto-industrial programme to earmark a tax benefit for auto battery makers who seek out raw materials within the Southern African Development Community region.
More than a quarter (26.3%) of the Indian economy’s import of intermediate goods and services is later embodied in exports, according to the OECD, a trend that has grown since 2008, especially in the textiles sector. However, alongside this development there has been growing “localisation” of inputs that were imported, as can be seen in the automotive sector, where the growth of the Indian component sector has meant a declining (now around 20%) reliance on imported inputs.
This compares to South Africa, where slow progress on localisation has meant that just under two-thirds (64.4%) of our auto export basket is made up of imported intermediate inputs. This has implications for the trade, tax and investment-related elements of our auto-industrial programme.
“I propose to extend the basic customs duty exemption given to capital goods used for manufacturing lithium-ion cells for batteries,” Sitharaman said, going further to propose a “basic customs duty exemption to the import of capital goods required for processing of critical minerals in India”.
South Africa is seemingly following suit, with proposed amendments to the auto-industrial programme to earmark a tax benefit for auto battery makers who seek out raw materials within the Southern African Development Community region and a generous 150% capital depreciation allowance, proposed in the Taxation Laws Amendment Bill, for capital investments made by battery and hydrogen electric vehicle makers.
The takeaway is that navigating trade dynamics in a world of hostile geopolitics, vulnerable supply chains and widespread belligerence requires crafty use of the entire toolbox. Not only tariffs.
• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.
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