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Protection and industrial structure in India


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  • Aksoy, M. Ataman
  • Ettori, Francois M.
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    Effective protection rates in India are so high and vary so greatly that anything short of low uniform tariffs and the complete elimination of quantitative restrictions would not make the industrial incentive scheme transparent, as it needs to be. The authors produce evidence to show that there is ample scope for reducing tariffs and quantitative restrictions and that most industries could coexist with much less protection than they now have. By eliminating all surcharges on inputs (tariffs on imported inputs, price differentials on local inputs, nondeductible excise taxes) - even without correcting for the effects of high investment costs - most projects (including import substitution projects) would earn from current international prices a positive profit margin on their marginal as well as full production costs. The proportion of projects with a positive profit margin would triple, from 20 to 63 percent. Among import-substituting projects that are not candidates for export under the present trade regime, under the proposed new regime half would be candidates for export if they would procure their inputs at international prices. Lower tariffs would fulfill their primary purpose more effectively: providing protection and incentive signals. The function of generating public revenues, another critical issue in India, should be fulfilled not through tariffs but through more efficient and protection-neutral instruments - in particular direct taxation (income tax) and nontariff indirect taxation (neutral excise taxes, MODVAT, and preferably the value-added tax on consumption).

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 990.

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    Date of creation: 31 Oct 1992
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    Handle: RePEc:wbk:wbrwps:990

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    Related research

    Keywords: Environmental Economics&Policies; Economic Theory&Research; Access to Markets; Markets and Market Access; Consumption;


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    1. Ettori, Francois, 1990. "The pervasive effects of high taxation of capital goods in India," Policy Research Working Paper Series 433, The World Bank.
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    Cited by:
    1. Go, Delfin S. & Mitra, Pradeep, 1998. "Trade liberalization, fiscal adjustment, and exchange rate policy in India," Policy Research Working Paper Series 2020, The World Bank.


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