Revision of reciprocal tax from 27 to 26 per cent to have small indirect effect on India: Niti Aayog

New Delhi: Government’s think-tank Niti Aayog, on Friday, said that the US reciprocal tariffs, which has been later revised downwards by White House that the import duties to be imposed on India from 27 per cent to 26 per cent, would have a small indirect effect on India given the domestic economy’s low dependence on foreign trade. “The Aayog is of view that in the medium term, the negative factors emanating from the imposition of tariff would be minimised with the implementation of the first phase of the proposed US-India Bilateral Trade Agreement,” said Niti Aayog member Arvind Virmani.

As per a White House document, the United States has revised downwards the import duties to be imposed on India from 27 per cent to 26 per cent and these duties will come into force from April 9. While announcing the reciprocal tariffs against different countries on Wednesday, US President Donald Trump held up a chart, showing the tariffs that countries such as India, China, the UK, and the European Union will now have to pay. However, the chart indicated that India charged 52 per cent tariffs, including currency manipulation and trade barriers, and America would now charge India a discounted reciprocal tariff of 26 per cent. Earlier, the White House documents showed a 27 per cent duty on India.

However, as per the latest updates, it has been revised downwards to 26 per cent. When asked, industry experts, however, are of the opinion that one per cent would not have much of an impact. In the long term, even Virmani also said this revised (26 per reciprocal tariffs) will have a small indirect effect on India given our low trade dependence. “The final bilateral trade agreement (BTA) with the US will aim to enhance the potential gains during the next 5 to 10 years,” the economist said.

The US has announced 26 per cent reciprocal tariffs on India saying New Delhi imposes high import duties on American goods. Virmani also explained that the reciprocal tariffs are calculated by a formula which includes the US trade deficit with a country and imports from that country. “Every country is, however, feeling the effect of increased trade policy uncertainty during the last few months, adding "world trade, FDI, investment and GDP growth will all be affected,” he said.

“Very broadly, there are three categories; (a) Exempt goods (e.g; pharmaceuticals): little or no effect. (b) exports in which largest competitors in the US market are from EU or LAC: reduce demand for India, (c) exports in which closest competitors are from east & south east Asia, the demand for India would tend to increase,” he added.

He also observed that to the extent to which US imports from many countries are reduced, all these countries would reduce the prices of their exports to other countries, besides the US. While noting that the direct effect on the rest of the world is therefore deflationary, Virmani also said that supply-side disruptions can however produce sharp increases in prices of some goods, whose aggregate inflationary impact is difficult to predict at this point.