Like every year before the budget the Finance Minister is besieged with diametrically opposite demands from different segments of the industry. For example, the indigenous manufacturers ask for custom duty increases and the transnationals asks for its reduction.
How will she decide?
Frankly, it is not easy. Why?
Because there is a lot of rhetoric and it is difficult to distinguish rhetoric from reality. And a single misstep costs the country.
Fortunately, there are examples from the past on how other governments navigated similar crossroads. Let us discuss one which was negotiated with the help of the noted Economist, David Ricardo.
At the turn of the 19th century, food grains dominated the landscape in Britain. The business world was divided into two opposing camps – the landed, grain-growing aristocracy and the rising industrialist (capitalist). With increasing population Grain prices were going up. Even low-quality grain was also selling at a premium! This inflation was burdened common man and the industrialist also had to pay more to his worker as the price of food largely determined the labour cost.
Distressed by the grain prices the industrialists started importing grain from other countries. This brought the prices down, but the tempers of local landlords went up. Competition intensified, bringing the landlords’ profits down and forcing them to match the imported grain in quality.
Using their overwhelming might in the parliament the Landlords passed the corn laws. These laws were an iron clad system of protection through high custom duties, which even went up as the prices of foreign grain fell!
But the Napoleonic war and some failed harvests started making the mistake fester and smell. However, the landlords were still in control of the parliament. Which ruled that the duty on grain be raised even higher! The rationale being higher prices in the short run would stimulate higher production of local grain in the long run!!
Grain inflation reached backbreaking levels. The parliament was flooded with petitions from the common public and the industrialists.
David Ricardo the leading economist of England weighed-in in favour of the ‘hard working industrialists’ and started compelling and tireless campaigning for lowering of duties. Eventually the parliament repealed the corn laws and cheap grain was permitted to come freely into Britain.
The case of medical devices, in my view, is some ways akin to the historical case of Grain. Nearly 80% of medical devices used in India are imported. The current ecosystem supports manufacturing of products with limited engineering complexity or products which emerge from the cusps with other sectors in which India is already strong. In both these segments India is doing well.
The basic custom duty level is 7.5% to 10% which further adds ad valorem tax (5 percent), higher education cess (1 percent), and GST (12-18 percent) making a final count of 26% to 34% in just taxes. Perhaps, the protectionist instinct driven by unsubstantiated claims in this sector, went over-board some time and that is why we have such high tariffs. The burden of custom duties is finally borne by the patient.
Compared to this in neighbouring South Asian countries the customs duty is around or below 5%. This disparity serves a useful benchmark and highlights a major risk: The increased likelihood of smuggling. Such illicit activities not only result in lost tariffs and taxes for the government but, more critically, expose patients to products that lack legal and service guarantees.
In the interest of quality and affordability, fostering competition, maintaining pragmatic equity with neighbourhood tariffs, harnessing the international current which brings most of the investments in R&D, manufacturing, and market development, there is the need to reduce the custom duties on all products which are not import substitutable in the short to medium term.
It is for the Finance Minister to assess the track record of the cohorts, draw lessons from historical precedents and our tariff experience and come up with evidence-supported measures in the upcoming budget.
– Pavan Choudary
First Published in Hindu Business Line