Finance Minister Nirmala Sitharaman’s statement that customs reform will be a top priority in the next Union Budget signals a recognition that India’s trade ambitions cannot be realised through free trade agreements (FTAs) alone. Customs administration — often invisible but decisive — determines whether lower tariffs actually translate into competitiveness, exports, and jobs.
Why Customs Reform Is Central to Growth
Customs reform goes well beyond cutting tariffs. It encompasses simplifying tariff structures, reducing procedural delays, streamlining documentation, and upgrading physical, digital and human infrastructure at ports and borders. Efficient customs systems lower transaction costs, improve predictability, and integrate domestic producers into global value chains.
This is especially relevant as India has re-entered the FTA arena after a hiatus. Since 2020, India has concluded trade agreements with partners such as the UAE, Australia and the UK, while negotiations with the EU and the US are ongoing. These agreements create export opportunities — but only if domestic systems, especially customs, are fit for purpose.
Tariffs, Sovereignty and WTO Rules
Customs duties are often portrayed as inherently distortive. That is misleading. Under the framework, tariffs are a legitimate instrument of State sovereignty, unlike quantitative restrictions. As the WTO Appellate Body held in “India–Additional Import Duties” (2008), tariffs can serve policy objectives such as revenue generation.
The real policy challenge is not whether to use tariffs, but how to design them within WTO and FTA commitments to support national competitiveness rather than undermine it.
The Inverted Duty Structure Problem
One of the most damaging distortions in India’s tariff regime is the inverted duty structure. This arises when import duties on finished products are lower than those on raw materials or intermediate inputs. For example, if tyres attract a 5% duty but raw rubber faces a 10% duty, domestic tyre manufacturers are put at a disadvantage.
As India lowers tariffs under multiple FTAs, such inversions can become more frequent. Correcting them is critical for:
- Enhancing competitiveness of Indian manufacturing
- Allowing access to low-cost global inputs
- Attracting export-oriented foreign direct investment
- Integrating India into global supply chains
The 2025 Budget made a start by rationalising some tariff lines, but a deeper and more systematic overhaul is needed.
Rules of Origin: A Necessary but Delicate Balance
FTAs require clear and predictable rules of origin to ensure that only genuine partner-country products receive tariff preferences. Without them, goods from non-partners — for instance, Chinese products routed through Singapore — could enter India at concessional rates.
India’s recent shift from certificate-of-origin requirements to proof-of-origin rules strengthens enforcement. However, it also raises compliance costs for legitimate importers. Excessively burdensome origin verification can discourage firms from using FTA preferences at all, defeating the purpose of the agreements.
Effective customs reform here requires a careful balance: preventing misuse without choking genuine trade.
Non-Tariff Measures and the QCO Dilemma
Tariff reform alone is insufficient if non-tariff barriers expand unchecked. Quality Control Orders (QCOs), which fall under the WTO’s Technical Barriers to Trade (TBT) Agreement, illustrate this tension. While intended to keep substandard products out of the Indian market, QCOs have increasingly been criticised as protectionist.
Economists such as Arvind Subramanian have shown that QCOs on man-made fibres like polyester yarn and viscose staple fibre led to falling imports even after tariff cuts — hurting downstream apparel exports. This demonstrates how indiscriminate non-tariff barriers can negate the benefits of tariff rationalisation and perpetuate inverted duty structures.
Concerns raised by other WTO members about transparency and lack of alignment with international standards further underscore the issue. The government’s recent decision to simplify QCO procedures and rescind them for several raw materials is therefore a welcome reset.
Why Reform-in-Silos Will Not Work
Customs duties, rules of origin, and non-tariff measures are deeply interconnected. Reforming one area while neglecting others yields diminishing returns. Lower tariffs lose impact if QCOs block inputs; better FTAs fail if customs procedures are slow or unpredictable.
What is needed is a coherent, economy-wide approach to trade facilitation.
The Political Economy Challenge
Overhauling customs and related regimes is politically difficult. Tariffs, standards, and procedures create winners and losers across sectors and regions. Managing stakeholder pressures while pushing reform requires political capital and administrative capacity.
Yet inaction is costlier. Without bold customs reform, India risks signing ambitious FTAs that deliver little on the ground.
What to Note for Prelims?
- Customs duties are permitted under WTO rules; quantitative restrictions are not.
- Inverted duty structure discourages domestic manufacturing.
- Rules of origin prevent misuse of FTA preferences.
- QCOs fall under the WTO TBT Agreement.
What to Note for Mains?
- Analyse the role of customs reform in enhancing export competitiveness.
- Discuss the economic impact of inverted duty structures in India.
- Evaluate the trade-offs involved in stricter rules of origin.
- Examine how non-tariff measures can offset gains from FTAs.
Customs Reform as a Growth Enabler
Customs reform is not a technical footnote to trade policy; it is its operational core. If India is serious about leveraging FTAs to raise exports, incomes and employment, it must pursue integrated and courageous reforms across tariffs, procedures and non-tariff measures. The Finance Minister’s stated priority is therefore not just timely — it is indispensable for India’s next phase of economic integration and growth.
