Author: Henry Textile Publish Time: 2024-10-18 Origin: Henry Textile
Fabric tariffs play a crucial role in shaping India's textile industry and its economy. These taxes imposed on imported textiles and clothing items serve multiple purposes, including:
Protecting domestic manufacturers from foreign competition.
Generating revenue for the government.
Regulating the flow of textile imports.
India’s policies on fabric imports directly impact several key areas, such as employment in the textile sector (which employs over 45 million people), export competitiveness, domestic manufacturing capabilities, and consumer prices.
For example, in 2018, India doubled import duties on over 50 textile products to 20%, affecting items like jackets, suits, and carpets. But what are the pros and cons of these policies? And how do they affect the various stakeholders in the textile industry? As we delve deeper, we’ll explore these questions and uncover the intricate tapestry of India's textile trade policies.
The evolution of India’s fabric tariff policies reflects the country’s journey from strict protectionism to a more balanced approach to trade liberalization. Let's explore the key milestones:
1940s-1960s: Protectionist Era
In the early years post-independence, India adopted a protectionist stance with high tariffs on textiles, reaching an average of 350% by 1950 to shield the nascent domestic industry.
1970s-1980s: Gradual Liberalization
The 1970s saw a gradual easing of restrictions, and by 1980, textile tariffs had fallen to about 100%. However, many quantitative restrictions remained in place.
1990s: Economic Reforms
The economic liberalization of 1991 marked a turning point, as India began dismantling its import licensing system. Textile tariffs were reduced significantly, although they remained relatively high compared to global standards.
2000s: WTO Commitments
India’s entry into the WTO in 1995 further accelerated tariff reductions, and by 2005, the average textile tariff had dropped to around 20%. The phasing out of the quota system followed as part of the WTO Agreement on Textiles and Clothing.
2010s-Present: Balancing Act
In recent years, India has balanced trade liberalization with protecting domestic manufacturers. In 2018, for instance, India doubled import duties on over 50 textile products to 20% in a bid to support local producers.
Today, India’s fabric tariffs vary depending on the type of fabric imported. The basic customs duty rates include:
Cotton fabrics: 10%
Silk fabrics: 20%
Wool fabrics: 20%
Man-made fiber fabrics: 20%
In addition to the basic customs duty, imported fabrics are also subject to:
Integrated Goods and Services Tax (IGST): 5-12%, depending on fabric type.
Social Welfare Surcharge: 10% of the basic customs duty.
For example, a $10,000 shipment of polyester fabric would face:
$2,000 (20%) in basic customs duty,
$600 (6%) in IGST,
$200 in Social Welfare Surcharge,
resulting in a total of $2,800 or 28% of the import value.
Specific duties based on weight or area also apply to certain fabrics, such as wool and cotton, protecting domestic manufacturers from low-priced imports.
The complexity of India's fabric tariff structure stems from several key objectives:
Protecting the domestic textile industry:
High tariffs give Indian manufacturers a competitive edge by making imported fabrics more expensive. For example, the 20% duty on cotton fabrics shields India's cotton textile sector, which employs millions.
Revenue generation:
Tariffs contribute significantly to government revenue, with textile imports generating over $1 billion in 2019-20.
Promoting value addition and employment:
Higher tariffs on finished fabrics compared to raw materials encourage domestic processing and job creation. For instance, raw cotton faces no duty, but cotton fabrics are taxed at 10%.
Balancing trade deficits:
Tariffs help manage India’s trade balance, especially during surges in textile imports, as seen in 2017-18.
Strategic industry development:
Specific tariff policies nurture key sectors like technical textiles, where India seeks to build expertise.
India’s fabric tariffs have had significant impacts on imports, exports, and domestic production:
Impact on Fabric Imports:
Following the 2018 tariff hike, fabric imports declined by 6.2% in 2018-19. However, imports from Bangladesh, which benefits from duty-free access, grew by 44% between 2016-17 and 2017-18.
Effect on Domestic Fabric Production:
The textile production index rose from 113.4 in 2014-15 to 130.7 in 2018-19, with a 4% increase in man-made fiber production in 2019-20.
Consequences for Textile Exports:
High tariffs on imported inputs have made Indian exports less competitive. For example, textile export growth slowed to 1.66% in 2018-19, compared to 5.37% the previous year.
Impact on Manufacturers:
Higher duties have helped domestic weavers and knitters expand their market share, but apparel exporters relying on imported fabrics have faced increased input costs.
India’s fabric tariff policies face several challenges:
High input costs for manufacturers:
High tariffs on imported fabrics have raised costs for garment exporters, making it harder to compete globally.
Complexity of the tariff structure:
With over 400 tariff lines, compliance can be difficult for importers.
WTO commitments:
India faces pressure to lower its tariffs in line with WTO agreements, with trading partners challenging its policies.
Smuggling and mis-declaration:
High tariffs have led to a rise in fabric smuggling and import mis-declaration, with a 32% increase in 2019-20.
Impact on consumers:
Tariffs have added 15-20% to clothing costs for Indian consumers, according to a study by the Indian Council for Research on International Economic Relations.
India has made several adjustments to its fabric tariff policies in response to industry needs:
Recent Tariff Reductions:
In 2019, India reduced duties on 75 textile items to ease raw material shortages, cutting the duty on nylon staple fibers from 7.5% to 5%.
New Export Schemes:
The 2020 Remission of Duties and Taxes on Exported Products (RoDTEP) scheme aims to refund previously non-refundable taxes on exported textiles.
Ongoing Trade Negotiations:
India is engaged in free trade talks with the EU and UK, which could reshape fabric tariffs in the coming years.
Looking ahead, India is expected to continue fine-tuning its fabric tariffs to balance domestic protection with export competitiveness, while also promoting high-value sectors like technical textiles.
Q: Why does India maintain high fabric tariffs?
A: India uses fabric tariffs to protect domestic manufacturers, generate revenue, promote value addition, and manage trade balances.
Q: How do fabric tariffs impact Indian consumers?
A: Fabric tariffs can increase prices and limit choices for Indian consumers, as they make imported textiles more expensive.
Q: Are India's fabric tariffs compliant with WTO rules?
A: There is ongoing debate about this. Some trading partners have challenged India's tariffs at the WTO, arguing that they exceed bound rates.
Q: How have fabric tariffs affected India's textile exports?
A: The impact has been mixed. While tariffs protect domestic producers, high tariffs on inputs have sometimes made Indian exports less competitive.
Q: Is India likely to reduce its fabric tariffs in the future?
A: India is gradually adjusting its tariffs, balancing industry protection with export competitiveness and international obligations. Future reductions are possible, especially through trade agreements.
