Under the old economic order, India followed a policy of import substitution. This led to the establishment of a complex system of licensing and control over imports through non-fiscal and fiscal barriers.
Trade Policy Reforms have been one of the major planks of the new economic policies initiated from July 1991 onwards. Changes in trade policies have included a significant scaling down of tariff barriers, and a partial dismantling of the system of import and export licences and simplification of procedures.
The new trade policy is spelt out in the Export Import (EXIM) policy, which is valid for the period 1992 to 1997, amendmentsto this policy were announced on 31st March 1995.
All goods can be imported freely except for a small Negative List consisting of:
Quantitative restrictions on imports of capital goods and intermediates have been almost completely removed. The import of second hand capital goods is allowed, provided they have a residual life of 5 years. Import of all items, except those included in the Prohibited List, is permissible free of duty for export production under a Duty Exemption scheme. In order to facilitate expeditious approvals of import proposals under this scheme, input-output norms for more than 3,000 items have been announced.
Import of capital goods, either new or second hand, is also permitted at a concessional customs duty rate of 15% under the Export Promotion Capital Goods (EPCG) scheme, subject to the fulfilment of specified export obligations.
The Government has clearly stated its commitment to bringing tariff rates down to international levels in a phased manner. There has been a consistent decline in these rates over the past three years from the peak rate of 300% in June 1991 to a peak rate of 50% at present. Capital goods imports which were earlier subject to tariff rates of around 100 per cent, now attract duties in the range of 20-40 per cent, with the basic import duty on general capital goods at 25 per cent. Import duties on equipment are even lower for projects in specific sectors and nil for export oriented projects.
A duty rate of 20% is levied on equipment for power projects and there is no duty on equipment for fertiliser projects.
The reduction in tariff rates are specifically significant on an import weighted basis. Published tariff rates do not fully reflect the nominal levels of protection, due to numerous exemptions. Collection rates (the ratio of the realised customs revenue to the value of imports of a commodity) provides a more accurate picture.
Tariff Rates for Selected Goods: 1990-91 to 1993-94
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1990-91 1991-92 1992-93 1993-94
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Import Weighted averages(per cent)
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Total 87 64 47 33
Agricultural Products 70 30 25 17
Capital Goods 97 76 50 38
Intermediate Goods 117 55 40 31
Consumer Goods 164 144 NA NA
Collection Rates (per cent)
Total 47 44 37 NA
Food Products 47 27 12 NA
Capital Goods 60 64 53 NA
Chemicals 92 82 71 NA
Man-Made Fibres 83 63 45 NA
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The recommendations of the tax reforms committee headed by Dr. Raja Chelliah, which have been accepted in principle by the government, would entail reduction in tariffs so that by the year 1997-98, the ad valorem import duty rates on indutrial inputs would range from 5% to 30%. The duty on non-essential consumer goods would then be no more than 50%.
Export of goods is allowed freely, except for a few items in the Negative List of Exports:
Exports are the major focus of India's trade policy. The export promotion package compares favourably with incentives offered elsewhere in the world. It makes special effort to arract foreign investors to set up export oriented units in India.
The trade environment has undergone a major transformation of a single market determined exchange rate for the Rupee since March 1, 1993 and the accomplishment (with effect from August 20, 1994) of Article VIII status in the IMF. The Rupee is not convertible on the capital account.
All export and import transactions are conducted at the market rate of exchange. The market rate also applies to other transactions, including inflow of foreign equity for investment and outflow in the event of disinvestment, payments in respect of repatriation of dividends, fees and royalties for technical knowhow agreements and also for foreign travel.
Centre for Monitoring Indian Economy, Bombay
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Last updated: May 1995.