TCS Daily


India's Half-Baked Liberalization

By Kaushik Das - February 15, 2006 12:00 AM

India's balance of payment crisis in 1991 prompted economic reforms to save the Indian economy from bankruptcy. While efforts to open the Indian economy to the rest of the world should be applauded, the liberalization programmes have still been skewed.

For example, there is a definite bias in formulating import tariffs for different sectors of the economy. The peak import duty has been reduced drastically in almost all the sectors including steel, telecom and petrochemicals. However, the automobile sector has somehow managed to dodge past such changes and keep itself cozily protected. The import duty on foreign vehicles still attracts a 103.39 percent duty, which is unheard of in any developed country.

The steel sector currently has an import duty of 5 percent, which was 45 percent just a decade ago. Despite the reduction, Indian steel manufacturers have survived -- and managed to provide excellent quality steel at globally competitive prices. The tremendous competition in the telecom sector has revolutionized communication. Millions of middle class people can now afford mobile phones. The import duty in the polymer sector has been reduced from a grotesque level of 65 percent to a modest 15 percent, and yet, this sector has managed to stay globally competitive.

Competition prompted these sectors to focus on reducing cost, giving more importance to productivity and efficiency and delivering quality products comparable to world-class companies. Customers have gained from such cut-throat competition.

Now let us consider the automobile industry. High import tariffs in the automobile sector are hurting consumers the most at the cost of the inefficient producers. The largesse of duty protection to the automobile industry is evident in their fat bottom lines. Moreover, a miniscule percentage of profits are ploughed back into R & D.

If import tariffs were rationalized in this sector and brought at par with the other sectors, we could get fuel efficient, multi-fuel, safe and modern imported vehicles at much lower prices than that are sold in India. This inflow of competitively priced foreign vehicles would ensure that the Indian auto manufacturers bring their prices to competitive levels or go out of business. What difference does it make to a consumer whether a vehicle is made in the domestic economy or some foreign land as long as he manages to get a safe and good quality vehicle at a competitive price?

Foreign made vehicles -- like cars, trucks, buses and taxis -- are more fuel-efficient and can not only ease our environmental problems to a large extent but also be a boon to the exchequer. In addition to adhering to stricter environmental norms, foreign auto manufacturers put maximum emphasis on the safety factor, which Indian auto manufacturers do not.

If import duties were brought down, Indian citizens could afford better and safer modes of personal as well as public transport. Today they are risking their lives everyday in outdated vehicles (especially given the bad condition of our roads). Effective and fast communication is of great importance for a country to be prosperous, but so too are safer and more fuel efficient modes of transportation. Indeed, transportation is of even greater importance for increasing the wealth-generation capabilities of people. How long should we be myopic in our desire to protect our inefficient producers at the cost of fellow consumers?

The author is a Research Fellow at the Centre for Civil Society, Delhi.
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