Protection in Indian Manufacturing

An Empirical Study

Hasheem Nouroz

Macmillan India Limited

230 pages/Rs 395

Economic reforms in India have aimed at reducing the high levels of protection provided to the manufacturing sector. And, according to Nouroz’s well-researched study, they have succeeded. Both nominal and effective rates of protection have been brought down considerably.

After briefly discussing the evolution of trade and tariff policy since Independence, the author examines in detail the protection received by different groups of commodities classified as industry-based, trade-based, input-based, import-competing, exporting, etc for both pre- and post-reform years.

The concept of the nominal rate of protection includes not only the ad valorem tariff but also import restrictions, exchange controls, multiple exchange rates and any other measures that have the effect of raising the domestic relative price of a good above its relative price in the world market.

The study finds that though in the post-reform period nominal tariff levels have not been lowered in a uniform manner, there has been an across-the-board reduction of tariffs by different amounts.

The chapter on the effective rate of protection may be considered Nouroz’s major contribution. The effective rate of protection measures the margin of protection on value-added in the production process rather than on the product price. The rate of protection is different from the nominal rate and depends on the stage of production at which duties are imposed.

The effective rate of protection is defined as the percentage excess of domestic value-added obtainable by the introduction of tariffs and its inputs over the world market value-added. While the nominal rate of protection affects consumers’ choice, the effective rate of protection indicates the effects on the processing activity of tariffs on inputs and thus affects producers’ choice.

The author uses alternative measures to estimate the effective tariff rate. These are the simple averages of tariff rates, import-weighted tariff rates and collection rates. Again, she finds that protection has come down in the post-reform period. However, when adjusted for the overvaluation of the exchange rate, she finds that both nominal and effective rates of protection have increased.

For instance, for exporting industries (that export more than 10 per cent of their output) she finds that the nominal rate of protection increased from 18 per cent in 1987-88 to 23 per cent in 1993-94, and the effective rate of protection increased from 22 per cent to 24 per cent over the same period.

Even after the reforms, import-competing industries continue to be more protected than exporting industries. For import-competing industries (those whose imports provide more than 10 per cent of domestic supply), the nominal rate of protection has increased from 31 to 37 per cent over this period and the effective rate from 41 to 47 per cent.

Tariff protection given to the manufacturing sector in India and its impact on productivity growth in the sector have been an important research theme. Isher Ahluwalia’s conclusion that there exists a negative correlation between total factor productivity growth and import substitution has been challenged by the author. Using a different methodology to estimate capital stock and value added, Nouroz does not find a relationship between trade regimes and total factor productivity growth.

The book gives the reader the impression that while India has gone some way in achieving the objectives of trade reform, there is still a long way to go. The multiplicity of rates and lack of uniformity create scope for lobbying. This affects both producer and consumer choice and continues to lead to inefficiencies in economy. A well-researched and detailed study, the book is a must for students of India’s trade policy and industrial development.