The pervasive effects of high taxation of capital goods in India

India's heavy duties on capital goods blur the incentive signals from the tariff structure. In practice, that structure favors import substitution of intermediate products from heavy industry and discourages exports. The complex protection structure should be simplified, with priority to slashing the duties on capital goods. The purpose of this paper is to contribute further to the existing studies by analyzing the international dynamics of the protection structure on the basis of recent data valid for the late 1980s. The project data were assembled with a view to providing quantitative indications, and answers to the following questions: (a) What are the respective profitabilities of the domestic and international markets for Indian industries?; (b) How much of Indian industry's lack of international competitiveness stems from the extra costs paid for inputs?; (c) What is the impact of India's investment costs, grossed-up by duties and taxes on imported equipment and by higher prices of domestic machinery, on the value added and the effectiveprotection of Indian industry?; (d) What is the minimum level of nominal protection required by Indian industry to compensate for the extra costs paid for its inputs and investments?; and (e) To which extent are the actual nominal and effective protections received by Indian industry in concordance with the levels of protection stemming from items (c) and (d) above?