India is expected to bring her tariff rates in line with the ASEAN levels in the
near future. Since the level of tariff adjustment may be large and the impact on
domestic industry due to such policy change could be significant, it is imperative to
quantify the impact of tariff policy changes on India’s industrial sector. The present
study is an attempt to gauge the impact of reductions in tariff on the Indian
manufacturing sector using a multiple-equations dis-aggregated econometric model.
An 838 equations model is estimated and solved to carry out simulations (under
alternative tariff reduction scenarios) encapsulating the impact of tariff reduction on
key economic variables like output, employment, invested capital stock, exports and
imports. The results of the study suggest that a substantial reduction in tariff rates, say
bringing down the import-weighted average rate for industrial products from about 20
percent as prevailing in the beginning of 2003-04 to about 10 percent (along with
associated currency depreciation and increased market access) would have only a
marginal impact on net exports, value of production and employment in the organised
manufacturing sector. It seems no significant adverse impact would be there on the
domestic industrial sector from the tariff cuts. Rather, a small increase in aggregate
industrial production and employment might occur emanating from the efficiency
enhancing effects of tariff reform. However, a detailed sector-wise analysis indicates
that the impact of tariff reforms would be differentiated across products i.e. opening
up of new opportunities and potential threats, with firms in some industries gaining
and firms in some other industries losing in terms of net exports, value of production
and employment.