Building robust trade practices: Protectionism and India in the age of an open economy

India has signed many bilateral and free trade agreements affording concessional tariffs or exemptions to member nations and is negotiating with other nations on more such arrangements.

By Meetika Baghel & Ritesh Kanodia

India has been at the forefront of introducing protectionist actions, has the highest tariffs in the world, and is known to have one of the most restrictive trade practices. The US notes that though it has sought opportunities to increase access to the Indian market, exporters from the US continue to face significant trade and non-trade barriers. The raising of import tariffs by the government in past years is seen as a reversal of the liberalised tariff rates India followed since 1991. While India has projected itself as a balanced inward- and outward-oriented economy, the accuracy of that assertion will have to be tested, especially in light of the stringent amendments introduced in the Customs Act, 1962.

India has signed many bilateral and free trade agreements affording concessional tariffs or exemptions to member nations and is negotiating with other nations on more such arrangements. As per the Foreign Trade Policy, India has 10 effective free trade agreements (FTAs) and six preferential trade agreements, and is engaged in formal negotiations for more than 18 such agreements.

However, the foundation of accord with member nations is questioned when such concessions are challenged post facto in the hands of Indian importers specifically where the exporting country has issued a valid certificate of origin (COO). Recently, FTAs and benefits accorded and received under them seem to have gone unnoticed, as it is believed that FTAs have not conferred any real benefits to the country and the trade deficit with member nations of FTAs has increased. The NITI Aayog, in ‘A Note on Free Trade Agreements and their Costs’, has said that India’s exports to partners and non-partner nations has increased year-on-year and any growth in Indian exports to such partner nations is owing to diversification and not to FTAs.

Disputes raised by Indian customs by challenging the appropriateness of COO that certifies the regional value content (RVC) are nothing but a backdoor approach to take away concessions granted to Indian importers. Authorities have alleged that exporters in member nations have failed to fulfil RVC, and this also raises questions on the appropriateness of COOs issued by regional authorities. Officials have failed to engage in a fruitful dialogue with regional authorities of partner nations to investigate the issue and have instead adopted the route of penalising Indian importers for undertaking such imports. Manufacturers of chocolate products, scrap and jewellery have been under the scanner for imports at a concessional rate of duty by availing the benefits under regional trade agreements and matters are being litigated. Courts in India have ruled that in case of FTAs, governments of member nations need to engage in dialogue to arrive at a solution, and importers in India, who in no way are involved in the process of determination of RVC and issuance of COO, cannot be punished.

Recent changes to the Customs Act, in the Budget 2019-20, counter these directives. A new chapter has been introduced that places the onus on Indian importers to prove that goods imported under the FTA benefit adhere to the prescribed RVC criteria. The provisions expect an Indian importer to pre-obtain and verify data relating to verification of an RVC without giving due consideration to the aspect that a seller would not be willing to share his cost data with the buyer. Member nations have, in certain cases, refused to share cost data with the Indian government under a retroactivity check, citing confidentiality. In the absence of an ability to prove an RVC with appropriate documents and data, the law affords sweeping powers to customs or revenue officials to temporarily suspend the preferential treatment or even reject the benefit claims to one or all, where they have reason to believe that such goods do not satisfy the origin criteria.

The provisions ignore that such preferential rates and treaty benefits have their genesis in the economic integration between nations and form the backbone of multilateral trade. By introducing such restrictions in the customs law, India is challenging the very foundation of the pact that was put in place by these nations including India. It is important to take remedial measures to reverse or counter the effects of wrong decisions in the past; however, the right way is to fix it through diplomatic channels. The partisan decision adopted by India may come across as India’s disinclination to work with its allies to reach an amicable solution.

India should, therefore, be more cautious in its ongoing negotiations, to build robust trade practices. Also, amidst the Covid-19 crisis, it is important for importers to re-verify the origin criteria of their imports, as there are likely to be alternations in supply chain at the suppliers end, thereby changing the earlier assumptions on procurement of raw material and calculation of RVC. This would also see an increase in scrutiny by customs authorities to minimise instances of abuse. In fact, Covid-19 and the current India-China standoff may compel the Indian government to relook treaty benefits with other countries for establishing new procurement hubs for essential imports for Indian manufacturers, and most critically on becoming self-reliant by subsidising imports of raw material rather than finished goods. Clearly, the need would be to achieve a right balance and ensuring that the objectives of granting concessions are endorsed in substance and not only in form.

Authors are with Dhruva Advisors