India's manufacturing sector has struggled to exceed 17% of GDP over the past 20 years. Taking note of inverted duty structures, a key reason for this underperformance, finance minister Nirmala Sitharaman in her last budget speech announced a comprehensive customs tariff review. This is welcome, given the pain inverted duties inflict on the sector by increasing the cost of domestic production and reducing competitiveness. Concomitantly, it limits investments, productivity and the overall growth of manufacturing. Fortunately, the government is working on addressing this problem.
An inverted duty structure (IDS) occurs when import duties on raw materials and intermediate goods are higher than those on finished products. For example, duties on TV electronic tubes are higher than those on finished TV sets. This discourages domestic TV makers, as they face high input costs while fully-assembled sets can be imported at prices they therefore find hard to match. Although India has reformed domestic taxation through GST, anomalies in the structure of import tariffs persist, hurting India's cost competitiveness.
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