India Transformed

by Rakesh Mohan

    77. Last year, I had begun the process of reducing import duties by lowering the ad valorem rates of basic plus auxiliary duties of customs to a maximum of 150 per cent. I now propose to lower the peak tariff level further by reducing the basic plus auxiliary rates of import duties (inclusive of specific duties) to a maximum of 110 per cent, with the exception of passenger baggage and alcoholic beverages.

  1993

  See Annex I, paragraphs 82, 97 and 98.

  1994

    56. … key features of my customs tariff reform proposals are:

  Further reduction in the peak rate of customs duty;

  Substantial reduction in duties on key raw materials, such as steel and chemicals;

  Reduction in customs duties on capital goods to boost investment combined with other incentives, which will help the domestic capital goods industry;

  Reduction or removal of anomalies caused by import duties on raw materials and components being higher than on finished products;

  A systematic effort to unify rates on similar products to serve both economic rationality and to reduce the scope for classification disputes;

  A major pruning of notifications, including end-use exemptions to about half their present number, thus reducing discretionary power and possibilities for disputes;

    57. I propose to reduce the peak rate of customs duty from 85 per cent to 65 per cent. Items like baggage and liquor will however continue to attract higher duty as at present.

  1995

    77. I shall deal first with import duties. The present peak rate of import duty of 65 per cent is still very high compared to other developing countries, let alone industrialized nations. I propose to continue the process of phased reduction in the peak rate by lowering it to 50 per cent.

  1997

  110. On more than one occasion, I have stated that we would achieve the average levels of tariffs prevalent in ASEAN countries by the turn of the century. This will give time to Indian industry to adjust to these changes. This year’s proposals should be seen in this background.

  111. I propose to reduce the peak rate of customs duty from 50 per cent to 40 per cent.

  112. High levels of customs duties on capital goods are inconsistent with our policy of attracting the best technology. Greenfield investments in large projects should be globally competitive. I have tried to harmonize the needs of the Indian industry with the requirements of the capital goods sector. I, therefore, propose a modest reduction in duty on capital goods from 25 per cent to 20 per cent. This reduced rate of 20 per cent will also apply to project imports. Over the next two to three years, these rates would need to be further adjusted to conform to levels prevalent in other developing Asian countries.

  1999

    71. Mr Speaker, Sir, I now turn to my proposals relating to customs duties. My proposals here reflect a balance of differing considerations. On the one hand, we are committed to a calibrated integration of our economy with the world economy. This would entail further phasing down of our customs duties to Asian levels. On the other hand, is the need to raise revenue and the fact that in a year of exceptional turbulence and uncertainty in the world economy, our industry should be cushioned against unusual surges of competitive pressure from imports.

    72. Sir, a special customs duty of 2 per cent was imposed in the Budget of 1996–97, and a further special customs duty of 3 per cent was imposed on certain items in 1997–98. The special customs duty of 5 per cent is in force till 31.3.1999. I have in the course of another discussion assured this House that the period of validity of this special customs duty will not be extended. I announce the discontinuance of the 5 per cent special customs duty with effect from 28.2.1999.

    73. After careful examination of various possibilities, and close interaction with the apex organizations of Commerce and Industry, I propose to reduce the existing seven major ad valorem rates of customs duty to five basic rates. The new rates will be:

  5 per cent, which will remain unchanged;

  15 per cent by substituting the existing 10 per cent rate;

  25 per cent by merging the 20 per cent and 25 per cent rates;

  35 per cent by merging the 30 per cent and 35 per cent rates;

  40 per cent, which will remain unchanged.

    75. To garner revenue to meet the country’s irreducible needs, I propose a uniform surcharge of 10 per cent on all commodities, excluding the following categories:

  Crude Oil and Petroleum Products;

  Items attracting 40 per cent rate of basic duty;

  Certain GATT-bound items;

  Gold and Silver

    76. Taking into account that special customs duty is being discontinued, and that crude oil and petroleum products are exempt from surcharge, the effective import duty rates on these products will stand reduced. This is consistent with the government’s established policy of rationalizing indirect taxes on these products in an agreed time frame.

    77. By exempting items attracting 40 per cent rate of basic duty from the surcharge, there is a modest but clear reduction in the peak rate of protective customs duty from 45 per cent to 40 per cent.

  2000

  108. I am conscious that in this area, I face serious constraints. We have to maintain a judicious balance between the need for providing adequate protection and growth impulses to the domestic industry and calibrating tariffs to international levels. We also need to carry the reform and rationalization process further.

  109. Taking all factors into consideration, I propose to reduce the peak rate of basic customs duty from 40 per cent to 35 per cent, thereby reducing the total number of customs-duty rates from five to four, i.e., 35 per cent, 25 per cent, 15 per cent and 5 per cent.

  110. The surcharge of 10 per cent, which I am constrained to continue on revenue considerations, will also apply to the new peak rate of 35 per cent. Crude oil and petroleum products, certain WTO bound items and gold and silver would continue to be exempt.

  114. Customs is not all about raising revenues. It is also a powerful tool for building our industrial capabilities and improving our international competitiveness. I propose to take several measures in this regard, picking up three sectors for special attention. These are integral parts of the ‘convergence revolution’, which is fast becoming a reality.

  115. First, and foremost, the Information Technology (IT) sector, which leads the current excitement. I propose to reduce the customs duty on several items for the IT sector.

  2001

  102. In my earlier budgets, I have endeavoured to ensure a continuity of approach in framing my revenue proposals. The principles that have guided me have been the need for growth in revenues, simplification and rationalization of the tax regime, and effective tax compliance through measures, which are friendly for the honest taxpayer, and a deterrent to the evader. I have reduced the number of rates in both customs and excise duties, simplified procedures and introduced measures to improve tax compliance. I have given up my discretionary power to grant excise and customs duty exemptions in individual cases thus saving hundreds of crores of revenue for Government. The policy of penalties against tax evaders has also been made non-discretionary. With all these steps, I have sought to put an end to a system that pressure groups or lobbies could influence. My attempt this year is to take this process to its logical conclusion.

  122. In my previous budgets, I have reduced the total number of major customs-duty rates to four, that is, 35 per cent, 25 per cent, 15 per cent and 5 per cent. I do not wish to propose any further reduction in the number of customs-duty rates this year. However, I propose to discontinue the surcharge of 10 per cent. With this, peak level of customs duty will decline marginally from 38.5 per cent to 35 per cent.

  123. All agricultural produce already attract the peak rate of duty of 35 per cent or more. Current tariffs on major cereals are: Wheat (50 per cent), Rice (70 per cent/80 per cent) and Maize (50 per cen
t). I now propose to increase the customs duty on tea, coffee, copra, and coconut and desiccated coconut from the present 35 per cent to 70 per cent.

  126. Mr Speaker, Sir, with the abolition of the remaining Quantitative Restrictions in April this year, second-hand cars will also become freely importable. To allay the fears of surge in import of second-hand cars, the rate of basic customs duty on their import will be raised to 105 per cent, which is three times the peak rate. The total duty now applicable to second-hand cars will be more than 180 per cent. I propose a similar structure of duty for the import of old multi-utility vehicles, scooters and motor cycles.

  2002

  132. The House may recall that, in my last Budget, I had announced that I would move progressively to reduce the peak rate of customs duty to 20 per cent within three years. I had also said that the modalities for this would be worked out in time for the next Budget. I had accordingly set up an Inter-Ministerial Working Group to recommend the modalities. The group has suggested a road map for this starting with this year’s Budget. After careful consideration of the group’s report, I have decided that, by the year 2004–05, there would be only two basic rates of customs duties, namely, 10 per cent covering generally raw materials, intermediates and components and 20 per cent covering generally final products. The existing rates would be adjusted and subsumed in these two basic rates with some exceptions on account of WTO bindings or higher tariffs for agricultural products. In accordance with the road map, I propose to reduce the peak rate from 35 per cent to 30 per cent this year. I also propose to make some changes to take care of some current problems.

  2003

  External Liberalization

  172. Rate rationalization and reduction of peak rates of customs duties has been an integral part of economic reform in the country. The economy has not only ‘weathered’ the removal of quantitative restrictions on imports and the reduction in customs-duty rates, but has responded by improving its competitiveness and demonstrating the inherent strength of its external balance of payments. As a part of this continuous process, and in line with the pronouncements made by several of my predecessors, I now propose to reduce the peak rate of customs duty from 30 per cent to 25 per cent, excluding agriculture and dairy products.

  2004

  119. Now, I turn to my indirect tax proposals. The policy signal that needs to be reiterated is that customs duties will be brought down in a measured way. It is my intention to align India’s tariff structure to those of ASEAN countries. Eventually, there should be a uniform rate of tax on goods and services. During the last four years, my predecessors had adjusted excise duties and moved them towards a central VAT rate. That process must continue. The most important goods in the manufacturing sector must therefore bear an excise duty of 16 per cent.

  120. Another principle that requires to be emphasized is that where an excise duty is levied, subject to only a few exceptions, like goods when imported should attract an equivalent countervailing duty (CVD). In my tax proposals, I have, therefore, removed the exemption from CVD enjoyed by some imported goods where there is no corresponding exemption from excise duty on India-made goods.

  121. I may also point out that customs tariffs and excise duties are interrelated. While considering the tax regime for any sector, one must look at both customs duties and excise duties applicable to that sector.

  122. The peak rate of customs duty was reduced to 20 per cent in January 2004. I propose to maintain the peak rate for the rest of the current fiscal year.

  2005

  112. I intend to advance the government’s declared policy of making the customs duty structure closer to that of our East Asian neighbours. Therefore, I propose to reduce the peak rate for non-agricultural products from 20 per cent to 15 per cent.

  2006

  120. In line with the government’s policy of reducing customs duties, I propose to reduce the peak rate for non-agricultural products from 15 per cent to 12.5 per cent. I believe that we are now only a short distance away from East Asian rates.

  2007

  126. In January 2007, the government announced wide-ranging reductions in tariffs. Import duties on capital goods, project imports, metals and specified inorganic chemicals were reduced by 2.5 percentage points and, in some cases, by 5 percentage points. Duties on some edible oils were reduced by 10 to 12.5 percentage points.

  127. In order to take one more step towards comparable East Asian rates, I propose to reduce the peak rate for non-agricultural products from 12.5 per cent to 10 per cent.

  III

  FOREIGN AND SECURITY POLICY FOR A RESURGENT INDIA

  7

  Foreign Policy in the Wake of Economic Reforms: New Options and Friends

  Shivshankar Menon

  Adjustments and changes to India’s foreign and security policies made in the early nineties have been continued by successive Indian governments, irrespective of their ideological preferences and domestic bases of support. India has redirected, retooled and reinvented her foreign policy, making new friends and exploring new strategic options.

  India’s burst of internal economic reform in 1991 coincided with a fundamental shift in international geopolitics. The collapse of the Soviet Union, the end of the Cold War and the demise of the bipolar world it had spawned saw the dawning of the US’s moment in history as the sole superpower, her unipolar moment. We, in India, saw a unique conjunction of domestic economic crisis and international phase transformation opening up new possibilities and options for our foreign and security policies. Fortunately for us, we had a leadership that was ready to use crisis as an opportunity to remake the practice of India’s foreign policy in the light of the changed situation, while keeping constant the pursuit of India’s core interests and strategic autonomy and agency in the international system. In effect, since 1991, India has redirected, retooled and reinvented its foreign policy, making new friends and exploring new strategic options. While this may be clear and obvious with hindsight, it was P.V. Narasimha Rao, Manmohan Singh and J.N. Dixit’s genius and, later, Atal Bihari Vajpayee, Jaswant Singh and Brajesh Mishra’s perspicacity, to see the broader picture despite the fog of contemporary events, narratives and counter-currents, and to act on it.

  In some ways, the reform of India’s foreign policy by Prime Minister P.V. Narasimha Rao, Finance Minister and, later, Prime Minister Manmohan Singh, and Foreign Secretary J.N. Dixit in 1991–96 was as thorough as the Nehruvian groundwork of the 1950s to cope with the bipolar Cold War world. But where Nehru wrote on an essentially blank slate and could count on solid domestic support, Rao could not. What they both had to cope with was a rapidly changing uncertain world as they laid the basis of future Indian foreign and security policy.

  In effect, the end of the bipolar world in 1989 liberated India’s foreign policy, creating space for new approaches and relationships that had been excluded by the rigidities of the Cold War. Of course, as with any great change, not everyone saw them as an opportunity. While most younger Indian diplomats and the top political leadership saw opportunity for India, there were also those, mostly older diplomats—the Cold War iron had entered their soul—who saw the changes as a threat to long-established and comfortable ways of dealing with the world. It was the simultaneity of the international changes (with internal economic crisis and the reforms they made inevitable) and the fundamental nature of the geopolitical changes around us that made thoroughgoing reform of our foreign policies possible and gave us the licence to explore new options.

  The new freedom that Indian diplomacy enjoyed was first visible in the country’s relationship with the US and, simultaneously, with China; in the new economic diplomacy that domestic reform required; in the establishment of diplomatic relations with Israel; and in the expansion of functional exchanges with Taiwan.

  With the US, the initial Indian reaction to the February 1991 Gulf War followed Cold War patterns: India was supportive of Saddam Hussein and sought a negotiated peace. This was larg
ely because India’s own polity was in flux, with short-term and unstable minority governments until P.V. Narasimha Rao’s government came to power in June 1991. India’s initial reaction to the 19 August 1991 coup attempt in Moscow by elements of the old Soviet order also seemed to suggest limited understanding of how much the world had changed. However, economic reforms, liberalization and Rao’s pragmatism—reflected in the decision to establish diplomatic relations with Israel in January 1992—were welcome evolutions in Indian policy from the point of view of the US. The liberalization and opening of the Indian economy bore immediate fruit in US–India trade, which almost tripled in the decade after 1991, from about $5 billion to $13.4 billion in 2001. It is also in this period that meaningful defence exchanges with the US and counterterrorism cooperation with the West began. American, British and French counterterrorism experts were invited to India for the first time after the 1993 Mumbai blasts, to see for themselves the evidence of Pakistani complicity in cross-border terrorism. This was, therefore, the period when the ground was prepared for the transformation of India–US relations under the subsequent Clinton and Bush administrations with the NDA-I and UPA governments, a bipartisan effort in both countries. The US no longer judged India through the Cold War prism of ‘with us or against us’, while India began removing the Pakistan incubus from India–US relations after the 1993 United Nations Human Rights Council (UNHRC) meeting, when the US began to start accommodating core Indian national interests and acknowledging her concerns.

  Rao realized the centrality of the US in the new situation and worked to overcome the detritus that the relationship had collected over several decades of mutual indifference. His was a subtle mind and complex approach. He began serious talks with the US on nuclear issues, the essential differences which had led to US sanctions against India after the May 1974 nuclear explosion and continued to poison the relationship for years. He simultaneously energized the nuclear weapon and missile programmes, making it possible for the new NDA government to carry out the nuclear weapons tests of 1998 within two months of coming to power. It was the space opened up by the new geopolitical situation that enabled India to explore these options. But with new possibilities came new complexities. The media has reported that pressure from the US prevented India from carrying out another nuclear test in 1993 when US satellites detected preparations at the test site at Pokhran.1 One theory, however, suggests that this was part of signalling, that Rao wanted the preparations discovered, both to signal India’s possession of nuclear weapon ready devices and to gain time to develop thermonuclear weapons, which were not yet ready. In doing this, he was also able to oblige the US in practice by postponing the tests and to begin a serious dialogue on nuclear issues with the US from a position of strength. The full truth of Rao’s private calculations will never be known, but the theory matches the known facts. Evidently, the new situation after 1991 opened several policy possibilities in sensitive fields, which had not existed before.