Import Challenges in India, and Ways to Fix Them

In an earlier blog, we discussed four problems faced by exporters in India and suggested solutions to these problems based on government response and expert advice. Today’s article is about the main challenges importers in India face while bringing foreign goods into the country, and possible solutions to those problems.

Imports have traditionally outpaced exports in India. In 2020-2021, India’s imports were valued at $388.92 billion while its exports amounted to $290.18 billion. The government is currently focused on boosting India’s share in global exports and reducing dependence on imports with an aim to promote domestic manufacturing. But that being said, India’s import volumes will not be coming down any time soon.

By the government’s own admission, the process flow for imports in India is more efficient than that for exports. That doesn’t mean there are no hurdles to bringing foreign goods into India. Import customs clearance and ground handling at ports take days when they should take hours, the government has said. India’s transport infrastructure is also vastly under-developed and a major obstacle to trade in general. However, the main challenges importers in India face are rooted in the country’s Foreign Trade Policy. Read on to find out what they are and what are the solutions to these problems.    

Challenge 1: High import duties

India’s import duties are among the highest in the world. Just take a look at its Most Favoured Nation (MFN) applied rate, which is what WTO member states have agreed to impose on trading partners who are also WTO members (unless they have a trade agreement in place, in which case preferential rates apply). India’s MFN applied rate averaged 15 percent in 2020 and 13.8 percent in 2019, according to the World Trade Organisation (WTO). In comparison, the average MFN applied rates in 2020 for the United States, European Union, and China were 3.4 percent, 5.1 percent, and 7.5 percent, respectively. (However, while India’s average MFN applied rate is higher than most countries, it’s maximum MFN rate is not, as the tables below show).  

India’s import duties are particularly high for agricultural products. It charges a simple average MFN rate of 34 percent. Corresponding rates for the US, EU, and China are 5.1 percent, 11.2 percent, and 13.8 percent, respectively.                    

The government’s reasoning for keeping import duties high is to protect local industries from a flood of cheap imports that might put them out of business. However, many importers, especially Micro, Small, and Medium Enterprises (MSMEs), say the high tariffs have made Indian industries highly uncompetitive. In this piece published in India Today in March 2021, Anil Bhardwaj, Secretary General of the Federation of Indian Micro, Small, and Medium Enterprises, explained, “If we make steel expensive by increasing import duties, then all the sectors [that use steel as raw material], such as engineering goods and auto components, become unable to compete globally.”

Prominent economist Arvind Panagariya believes India will achieve its stated objective of high export growth only if it continues to import at a healthy rate. At the Exim Bank’s annual lecture in March 2021, he said, “When we expand imports in the wake of trade liberalisation, we also expand exports to pay for the extra imports.”  

High import duties hurt not just importers but also exporters who depend on imported inputs and raw material for their finished products.  

Challenge 2: Protectionist policies

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India’s Foreign Trade Policy has turned increasingly protectionist in recent years. The emphasis on increasing import duties to protect domestic manufacturers affects importers in three ways:

• Frequent duty hikes – Frequent changes in import duty rates are the norm in India. These are announced in the Budget, presented in February, or through a notification in the Gazette of India. Take the case of mobile phones. Between July 2017 and February 2018, basic customs duty charged on imported mobile phones went from nil to 10 percent, then 15 percent, and finally 20 percent. This led to a drop in mobile phone imports. In recent budgets, the government has raised import duties on mobile phone parts to encourage Indian companies to manufacture their own components. However, its strategy has not gone to plan. Between 2013 and 2019, imports of mobile phone parts jumped from $1.34 billion to $16.28 billion. With production cost and quality still an issue in India, imports continue to thrive.

• Heavy rate hikes – Apart from frequent rate changes, India’s importers and its global trading partners complain of big rate hikes. For example, import duties on some agricultural products saw a huge jump between November 2017 and March 2018 – from nil to 60 percent on chickpeas, 50 percent on peas, 40 percent on large chickpeas, and 30 percent on lentils. According to a US government report, this rate hike severely affected imports of American pulses into India. In the 2020 Budget, the government proposed a 200 percent increase in import duty on toys (from 20 percent to 60 percent), leading to protests and a one-day strike by toy importers.  

• Aggressive use of Anti-dumping Duty – When a country exports goods to another country at a price lower than the market value, in order to gain an unfair advantage in the importing country or to get rid of excess stock, it is called ‘dumping’. Importing countries impose an anti-dumping duty (ADD) on such goods as a counter-measure against this unfair trade practice. The WTO allows countries to impose an ADD in specific situations to protect local industries from being harmed by dumped imports. Such a duty can be charged only after a thorough investigation by the government in response to an application filed by the concerned domestic industry. India is the top imposer of ADD among WTO countries. In 2015-2019, it initiated 233 ADD investigations, a massive jump from 82 investigations in 2011-2014. Most of the investigations were against products made in China. In recent years, India has imposed ADDs on chemicals and steel products from multiple countries, prominent among them China. An ADD is usually in force for five years, and may be extended or withdrawn mid-way. India’s ADD policy is often questioned, especially in terms of transparency and due diligence. Apart from the extra cost of an additional duty, an ADD also creates administrative problems for importers because it is levied in two stages – provisional and final.

Challenge 3: Complicated tariff structure

Trading partners say India’s import tariff structure is complex. The import duty paid by an importer on goods coming into the country is actually a collection of taxes and surcharges including but not limited to:

• Basic Customs Duty
• Countervailing Duty
• Anti-dumping Duty
• Safeguard Duty
• Social Welfare Surcharge

For an importer, especially a newcomer, it can be quite challenging to keep track of the various duty components applicable on their goods, how each one is calculated, and how the overall import duty is calculated. A complex structure with multiple components also means higher compliance and administrative costs.        

Click here to know about import duties in India and their calculation  

Challenge 4: Geopolitical tensions ‍

India is currently experiencing some strain in its trade ties with China and the United States, its two top trading partners. While this might not affect importers as directly as, say, high tariffs, it is still cause for concern and has the potential to become more problematic  in the future. Let’s look at what’s happening on this front:

• China: India’s long-drawn border dispute with China has always cast a shadow on bilateral trade between the two neighbours. The violent confrontation between Indian and Chinese troops in Ladakh's Galwan Valley in 2020 drove the wedge deeper. China is India’s top trading partner for both imports and exports. It makes up 13.7 percent of India’s total imports. However, in 2018-2019, China accounted for 80 percent of India’s imports in 375 product categories, according to a report by the Institute of Chinese Studies, Delhi. The report also found that India had a 100 percent dependency on China in 57 product categories, chief among them pharmaceuticals, electronics, and automotives. Such dependence on a single country/source is far from healthy, as India found out when China went into a coronavirus-induced lockdown in early 2020. India’s dye industry, for example, suffered a 20 percent loss in production due to disruption in the supply of raw material from China. Following the Galwan incident in June 2020, there were calls for a boycott of Chinese goods in India. But this did not impact imports. On the contrary, India’s imports from China grew to $5.6 billion in July 2020, almost touching the pre-lockdown level of $5.8 billion seen in March 2020. This once again demonstrated India’s import reliance on China.            

• Trade differences with the US: The US is India’s second largest source of imports (7.5 percent of India’s total imports) and a natural ally. Yet, trade tensions between the two have grown in recent years. Washington has often complained of India’s high import duties. The situation worsened in 2018 when the Donald Trump administration imposed fresh tariffs on a range of exports from India, including a 25 percent national security tariff on steel and 10 percent on aluminium. It also removed India from the Generalised System of Preferences, a preferential tariff system for developing countries. India retaliated by imposing duties on American products. This increased the price of American agricultural imports such as almonds, walnuts, cashews, apples, chickpeas, peas, wheat, and lentils as well as chemicals and steel. India is the largest importer of California almonds.

The solutions

1. Reduce tariffs

There is a near unanimous view that India must reduce import duties and seek other ways to achieve self-reliance. The WTO, in its 2020 Trade Policy Review of India, called for a reduction in tariffs. In January 2021, economist Arvind Panagariya recommended that Indian tariffs be brought down to a level of 10 percent. In an interview to The Print published in July 2021, economist Montek Singh Ahluwalia said that by raising customs duties, India was going back to the “ridiculously high” tariffs in the days before the 1991 economic reforms. “This is not consistent with the objective of making Indian industry competitive and integrating with global supply chains,” he added.

The best way to help local industries is not by discouraging imports but by helping them improve productivity and become more competitive, said a 2020 report by the Economic Research Department of the State Bank of India, the country’s largest public sector bank.

Even Indian industry seems to be coming around to the idea that protectionism isn’t good for business in the long run. Indicating as much during a pre-Budget meeting with Finance Minister Nirmala Sitharaman in December 2020, the Confederation of Indian Industry (CII) sought a graded move towards competitive import tariffs  over the next three years.        

2. Stabilise duty rates and policies

The WTO, in its report, called for India to put an end to frequent policy changes and rate adjustments, saying that these create “uncertainty for traders”. It said, “While the overall goal remains to increase exports, since policymaking in India is focused on domestic issues, trade policy is frequently used to encourage domestic production and meet domestic inflation and supply objectives. Thus, changes are made as required to import and export restrictions and the tariff to ensure stable domestic supplies of key products.”    

3. Simplify tariff structure

The WTO report also recommended that India simplify its tariff structure to make it “more predictable” and, hence, easier for importers and exporters to follow. Expressing the same view, a comment piece published in The Economic Times in January 2021 termed India’s customs tariff regime complex as it comprised “basic tariffs, cesses, assorted exemptions, and end-use restrictions on imports”. Advocating a transition to a simpler system, the article called for “transparency in rates to prevent mis-classification [of goods], easing customs procedures, and doing away with exemptions”.  

4. Reduce dependence on China

Boycotting Chinese goods is against Indian interests, according to Trade Promotion Council of India Chairman Mohit Singla. In an interview to Outlook published in June 2020, Singla said India should instead “compete naturally” with China while developing its domestic industry. “Initiating a trade war when we know India’s manufacturing ability will not be a good idea,” he added.

Rather than a boycott, the view is that India must undertake reforms to reduce dependence on Chinese imports. These include land and labour reforms, attracting more investment, and scaling up domestic production in import-dependent sectors such as electrical machinery and pharmaceuticals.

A research paper by the Indian Institute of Management, Indore, and the University of Pennsylvania, Wharton School, suggested strategies for India to reduce dependence on Chinese imports. These include:

• Playing a more proactive role in trade agreements

• Investing in skill development and entrepreneurship training, especially in the production of hi-tech and value-added goods
• Developing competitiveness in key sectors, such as the active pharmaceutical ingredients (API) industry. India was initially an API-producing country but now sources more than 60 percent of its APIs from China, the report noted
• Better collaboration between government departments on data-sharing and strategy-building

Meanwhile, the Indian government’s strategy for reducing imports from China includes the following steps:

• Using free trade agreements with other trading partners

• Taking the help of Indian missions abroad to find alternatives to China
• Boosting domestic manufacturing through Production Linked Incentive schemes

Click here to know about common problems exporters in India face, and their solutions