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Tariff Increases Impact Direct U.S. Exports to India

  • The Government of India (GOI) increased import tariff rates on several products in its Budget for 2018-2019. The tariff hikes were effective February 2, 2018. According to the Budget speech by Finance Minister, these duty changes were made to provide adequate protection to domestic industry, encourage domestic value addition by promoting ‘Make in India’ and help create more jobs in the country. USIN Foundation, however, opines that the increased protection to domestic industry makes imported products relatively more expensive, and therefore, discourage competition.
  • The tariff increases may initially help select-sectors in the ‘Make in India’, but it may ultimately result in an inefficient and incompetent domestic manufacturing sector unable to achieve economies of scale.
  • Below is a table summary of the basic tariff increases undertaken by the GOI in February 2018 Budget, and their potential impact on Direct U.S. exports to India.
  • In addition, the GOI replaced the Education Cess (EC) and Secondary & Higher Education Cess (SHEC) at the rate of 3% cent with a 10% Social Welfare Cess (SWC) to finance education, housing and social security schemes. Applicable on all imports, the SWC will be calculated at 10% on the aggregate taxes, which will also add marginal cost to the imports.
  • Key observations:
    • India’s tariff increases impact a total of $6665 million worth of U.S. exports in 2017, which is nearly 26% of total direct US exports to India.
    • Diamond exports were $4256 million in 2017, down from the 2016 level of $4867 million; however, it remains U.S. top export item, accounting for nearly 16.6% of total U.S. exports to India. India imports unprocessed/semi-processed diamonds from the U.S. for polishing, cutting and setting, and ships them back to the U.S.
    • Direct U.S. exports of ICT and electronic products in 2017, (4.45% share in total exports to India) rose to $1144 million from $1061 million in 2016; capital goods exports (0.73% share) were $188 million, up from $176 million last year.
    • Automobiles/motorcycles/auto parts sales from the U.S. to India in 2017 more than doubled to $974 million from the 2016 level, accounting for 3.8% of total direct U.S. exports to India
    • Tariff increases in respect of ICT & electronics, auto-parts and capital goods are targeted to support India’s “Make in India”