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to Return to Trade Reform
Slowly but surely, Prime Minister Vajpayee
and Finance Minister Sinha are laying to rest the doubts about their
resolve to implement economic reforms.
After returning to power, their first major victory came when they
successfully challenged the truckers’ strike and raised the price of
diesel oil. Soon after, they
confronted head on a strike by insurance workers and enacted the insurance
bill, thus, opening the sector to increased competition from domestic as
well as foreign sources. Most
recently, they have begun to move decisively on the privatisation front.
In what can be termed as the first true privatisation, the
government have transferred 74 percent of their stake in Modern Foods into
private hands, principally the Hindustan Lever.
Even the Indian Airlines is now up for sale.
Though genuine concerns remain with respect to the manner in which
this privatisation is to proceed, the mere fact that the government is
willing to transfer 51% of its stake in the airlines into private hands
speaks volumes for its future intentions.
While no one can now call Mr. Sinha “Roll
Back Sinha,” the minister’s image as a reformist finance minister
remains deficient in one key respect: he has taken no initiative worth the
mention in the area of international trade.
Trade liberalization, complemented by the removal of
investment licensing, had served as the cornerstone of the Rao-Singh era
reforms. These reforms
eventually delivered the unprecedented growth rate of 7.7% during 1994-97. After Mr. Singh left office, however, successive finance
ministers have only paid lip service to trade liberalization.
Mr. Sinha must break this trend by restoring momentum to trade
liberalization in the forthcoming budget.
Prior to the launching of the economic reforms in July 1991, all
categories of import goods¾consumer,
intermediate and capital¾were
subject to licensing and other controls.
Admittedly, some capital and intermediate goods were on the
so-called Open General Licensing (OGL) list but they accounted for no more
than 30 percent of all imports.
And the imports of consumer goods were virtually banned.
All goods, including those on the OGL, had to
additionally cross a tariff hurdle of the Himalayan proportions.
Like the Mount Everest, the peak tariff rate stood gloriously at
400 percent. Approximately 60 percent of the items were subject to tariff
rates between 110 and 150 percent. More
than 96 percent of the items were subject to tariff rates of 60 percent or
During its first three years, the Rao
government did away with licensing on virtually all capital and
intermediate goods. Custom
duties were cut drastically so that by February 1994, the highest rate had
come down to 65 percent. A
year later, when Mr. Singh presented his last budget, this rate came down
to 50 percent. In the same
year, tariffs on capital goods were brought down to 25 percent or less and
those on intermediate inputs to 40 percent or less.
Sadly, after the Rao government left office,
the momentum for trade liberalization evaporated.
Mr. Chidambaram introduced a Special Customs Duty of 2% in his
maiden budget of 1996-97 without major tariff reductions.
In the 1997-98 budget, he increased this duty to 5 percent.
To offset the increase in protection, he reduced the highest rate
in general to 40 percent and that applicable to intermediate inputs and
capital goods to 30 and 20 percent respectively.
When Mr. Sinha presented his first budget in 1998-99, he introduced
yet another duty, the Special Additional Duty (SAD), that amounted to as
much as 6 percentage points for high-tariff goods.
This sent the top tariff rate above the 50 percent mark that had
been achieved under the Rao-Singh regime!
Last year, Mr. Sinha allowed Mr.
Customs Duty to expire, which was a step towards liberalisation. But he also went on to substitute the existing 10 percent
rate by 15 percent and to merge the rates of 20 and 25 percent into 25
percent and of 30 and 35 percent into 35 percent.
These changes increased protection.
Thus, all things considered, it is doubtful that custom duties have
gone down more than 5 percentage points since the departure of the Rao-Singh
The only serious liberalization on the
horizon at present is with respect to consumer goods.
Since the beginning of the reform process, trade economists have
urged successive governments to remove licensing from this sector thereby
allowing consumers the same benefits of cheaper and higher-quality imports
that businesses have enjoyed through the liberalization of capital and
intermediate goods. But in
the end, it was a recent WTO dispute settlement ruling that finally forced
the government’s hand in favour of consumers.
Accordingly, 1429 consumer goods items are to be taken off the
licensing list starting April 2001.
This liberalization notwithstanding, our
tariffs remain excessively high. Whereas
the import-weighted average tariff in Sri Lanka has fallen to 10 percent,
ours exceeds 20 percent. Moreover,
given the escalation in tariff rates according to the stage of production,
the effective protection on higher stage of production is very
substantial. Our consumers
pay the cost of protecting not only the inefficient domestic producers but
inefficient foreign producers as well.
Why should the country pay one and a half times as much for locally
produced Ford automobiles as their imported counterparts?
Quite apart from the efficiency issue,
macroeconomic forces currently at work further increase the urgency for
import liberalization. Capital
inflows have been putting severe upward pressure on the value of the
rupee. The government’s
ability to continue accumulating dollars is bound to run out sooner rather
than later. Unless imports
are allowed to expand, this will cause the rupee to appreciate, affecting
adversely the performance of the tradable goods sector.
Above all, if we are to increase our exports
to GDP ratio from its current level of 10 percent to 20 percent, import
liberalization is inescapable.
Times, February 23, 2000