Incidence of tariff: the case of India, 1982-93

Abstract

In this paper, the effect of tariff is analysed at a broad sectoral level using a simple general equilibrium model. The sectors of the Indian economy have been classified on the basis of trade. Commodities have been identified as importables or exportables based on whether India is a major importer or exporter of a particular product. We have used an indirect approach to estimate the shift parameter employing time-series regression of changes in the relative price of non-tradeables to exportables and that of importables to exportables. The series were tested for stationarity and they were found to be stationary in the first differences. We used a dynamic specification to allow for lags in the adjustment of relative prices of non-tradeables to exportables due to changes in the relative price of importables to exportables. The estimate of the long-run shift parameter is found to be 0.74% and the estimate of the short-run shift parameter is 0.58%. Our results show that a 100% rate of customs duty results in ‘true’ protection of importable only to the extent of 14.9% in the long-run and a bias against exports to the extent of 42.5%.