Rational Tariffs and Protecting Domestic Industry

India needs a transparent, institutional mechanism to look at both the short and long-term implications of tariffs

Eleven days after US President Donald Trump’s inauguration on 20 January, Finance Minister Nirmala Sitharaman announced a tariff reduction for high-end motorcycles (800 cc and above). While Harley-Davidson wasn’t mentioned by name in the Budget 2025-26 — since tariffs are categorised generally —this move was clearly aligned with the long-standing US demand to lower trade barriers for US-made products.

Import duties were reduced to 40 per cent for bikes up to 1600cc and 30 per cent for those above 1600cc. For completely knocked down (CKD) units, the duty dropped from 15 per cent to 10 per cent, while for semi-knocked down (SKD) units, the duty is now 20 per cent instead of 25 per cent.

Market watchers aren’t sure if this will lead to a spike in Harley-Davidson sales. The tax rationalisation coincides with the introduction of the Agriculture Infrastructure and Development Cess (AIDC) on imports of such vehicles, leaving trade circles unclear about its influence on the final pricing.

Timeline of tariff

Let’s start with the ups and downs of Harley-Davidson’s not-so-smooth ride on the Indian roads.

Remember the ‘mango deal’ of 2007? India gave market access to bikes over 800 cc, while the US lifted its mango import ban. Harley-Davidson entered the market in 2010, selling fully built imports with a tariff of 100 per cent, which was later reduced to 50 per cent in 2018.

In 2014, Harley-Davidson introduced an Indian variant, the Street 750, priced at Rs 4.69 lakh, manufactured at its Bawal-based facility in Haryana. This was followed by a BS-VI emission norm version in 2019, priced at Rs 5.47 lakh.

However, with the onset of Covid, demand plummeted, and by September 2020, Harley-Davidson halted manufacturing and sale of Street 750 entirely.

But this was not the end of the road. Harley-Davidson then tied up with Hero MotoCorp to launch an even more affordable model – the Harley-Davidson X440, priced at Rs 2,29,000. It was pushed from Hero’s Neemrana factory in Rajasthan. The two auto majors decided to work together on the design, development, manufacture, and distribution of Harley-Davidsons.

However, this column is not about Harley-Davidson, Hero MotoCorp, or even the positives and negatives of tariff reduction. It is about the decision-making process behind tariffs.

Institutional gap

Unlike the long-drawn consultation process once followed by the Tariff Commission — before it was wound up in May 2022 — decisions now seem more like executive instructions from the PMO and/or the Finance Minister’s office. In fact, the work of the former Commission is now handled by the Tariff Policy Research Unit under the Board of Indirect Taxes (Customs & Central Excise).

Before the issue of tariffs and tariff lines were relegated to a departmental unit, these decisions were, at least in principle, guided by the Tariff Commission. The government was always within its power to accept or reject the Commission’s recommendations. As the last member-secretary, Shalini Prasad, noted, the Commission’s’ studies were based on “requestioning relevant information from industry, ministries/departments, research intuitions, non-official /semi-official /autonomous bodies, and persons. In using such information, the Commission will exercise due discretion, keeping in mind the overriding public interest.”

Whether key stakeholders were consulted for tariff reduction or not is not very clear. Even if they were, the time for deliberations would have been limited — making it valid to infer that the decision was largely political.

Tariffs, as well as non-tariff barriers (NTBs) are indeed par for the course in global, multilateral, and bilateral trade negotiations.

The point here is the need for a transparent, institutional mechanism to look at both the short and long-term implications of tariffs. A nation must consider not just the balance of trade but also the protection of domestic manufacturing. Conflicts of interest are highly likely—consumers want the cheapest options and producers seek to secure their market. And this holds true for auto parts as it does for pharmaceuticals.

History of the Tariff Commission

The history of tariffs in India can offer some answers—the creation of the first tariff board in India under the Empire’s rule, legislation creating the Tariff Commission, formation of the Bureau of Industrial Costs and Prices (BICP) along the lines of Commission for Agricultural Costs (CACP), their eventual merger, reports of the Administrative Reforms Commission (ARC), the political economy post-1991, and finally, the decision to abolish the Board in 2022.

As the ‘Journey of a Hundred Years: Tariff Commission’ report tells us, the recommendation for a specialist body to oversee tariffs came from the first Indian Fiscal Commission appointed in 1921. Its mandate was to safeguard the interest of India’s nascent industries, which had received a fillip on account of World War I. The exports of manufactured goods from India grew from 23 per cent in the pre-War years to 32 per cent by the war’s end.

The Commission believed that the state could support domestic industries by abolishing ‘unjust’ inland duties, and imposing duties on foreign goods to help compete in the open market. Incidentally, the intent of the first Tariff Act of 1894 to impose a 5 per cent ad valorem duty on all foreign goods was to increase revenue. It was raised to 7.5 per cent in the war years, and with deficit budgets from 1919 to 1922, customs duties were raised to 15 per cent, contributing 34 per cent of the Union government’s budget.

This was the background to the establishment of the first Tariff Board in 1923, under the chairmanship of G Rainy of the Indian Civil Service (ICS). Its first report was titled ‘Grant of Protection to the Steel Industry’. Between 1923 and 1939, the Board conducted 51 inquiries into products and commodities as diverse as paper and pulp to sugar, cement industry and heavy chemicals.

The next phase of the tariff board emerged during World War II. Ramaswamy Muralidhar, then Commerce Member of government, assured that industries developed during the war, either at the instance of the government or to meet civilian needs, would not be left ‘high and dry’ and would be ‘protected against unfair competition’.

At the dawn of Independence, RK Nehru, also from the ICS, suggested that the Tariff Board be given the additional mandate of advising the government on matters concerning economic and industrial development, an idea opposed by most departments. Nevertheless, the first post-Independence Tariff Board was established under the chairmanship of VT Krishnamachari of the ICS. He was later inducted by Nehru into the Planning Commission and served as a member of the Rajya Sabha from 1961 to 1964. With the passage of the Tariff Commission Act of 1951, the Board was redesignated as a commission.

In 1968, the ARC led by Hanumanthaiah recommended replacing the existing Commission with one focused on prices, costs and tariffs. And from 1976, the tasks were inherited by the BICP to ‘advise the government on a continuous basis on industrial costs and prices and on issues relevant to cost reduction, industrial efficiency and pricing of industrial products. Starting with its report on coal prices in 1971, the BICP brought out 861 reports until 1999.

With economic liberation making its functions less relevant, the BICP was merged with the Second Tariff Commission under Vijay Kelkar. This Commission brought out another 495 reports, the penultimate one in May 2022, analysing policy and trends in FDI for India.

However, the post-reforms ecosystem, India’s entry into the World Trade Organisation (WTO), and the establishment of regulatory bodies like the National Pharmaceutical Pricing Authority (NPPA) led to a reassessment of the Commission’s role. The Expenditure Reforms Commission (ERC) of 2001, headed by KP Geethakrishnan, felt that the work of the Commission was relevant, but highlighted several challenges — lack of autonomy, restrictive terms of reference, lack of in-house expertise, lack of ownership by the stakeholder departments and absence of an institutional mechanism for stakeholder engagement.

Yet, in a classic case of throwing the baby out with the bathwater, the Commission was shut down. The second part of ERC’s suggestion — that a new commission with greater clarity be established — is yet to see the light of the day.

(Sanjeev Chopra is a former IAS officer and Festival Director of Valley of Words. Until recently, he was director, Lal Bahadur Shastri National Academy of Administration. Views are personal)