In a world where the established multilateral trade order is rapidly unravelling, India stands at a critical juncture. With major economies like the United States imposing unilateral tariffs and China retaliating with export controls, the foundational principles of cooperative global commerce are under threat. For nations like India, the priority must shift decisively towards securing national interests and boosting global competitiveness. The recent announcement by Union Finance Minister Nirmala Sitharaman regarding a comprehensive overhaul of the customs framework is, therefore, both timely and essential.
Beyond Trade Agreements: The Need for Operational Efficiency
The success of India's trade strategy hinges on more than just signing agreements. While the country has built an impressive network of pacts with partners like Japan, Korea, ASEAN, Australia, the UAE, the European Free Trade Association, and the UK, with EU negotiations ongoing, the real test lies in implementation. The true benefit for Indian exporters will be realized only through streamlined customs procedures and a significant reduction in friction at the borders. The proposed reforms aim not just to shield India from external trade conflicts but to actively help it capture a larger share of global exports and integrate more deeply into vital supply chains.
A Dual Focus: Rationalizing Tariffs and Smashing Non-Tariff Barriers
Meaningful reform requires a two-pronged attack. First, India must simplify its complex tariff structure into a clear, three-tier system: the lowest rates for raw materials, moderate rates for intermediate goods, and higher rates for finished products. This rationalization should aim to bring India's applied weighted average tariff rate down from the current level of over 5% to the 1-2% range seen in competing economies like Vietnam, China, and Indonesia.
A critical issue to address is the inverted duty structure, which penalizes domestic manufacturers when import duties on finished goods are lower than those on inputs. Solutions like streamlined Import of Goods at Concessional Rate of Duty Rules can help eliminate this distortion. Furthermore, for capital goods, a direct tariff reduction to 0% for select sectors, from the current 7.5%, would be a more straightforward way to encourage investment, building on the spirit of existing schemes like the Manufacturing and Other Operations in Bonded Warehouse (MOOWR).
Second, and equally important, is tackling the maze of non-tariff barriers that silently inflate costs and create uncertainty. Despite progress in reducing cargo release times, significant hurdles remain. Experts, including Prachi Mishra and Vijay Singh Chauhan of Ashoka University's Isaac Centre for Public Policy, propose five specific interventions to transform the trading environment.
Five Specific Reforms for a Modern Customs System
1. A Single Regulatory Repository: Traders often face detention of goods at ports due to unclear compliance requirements, especially related to domestic Quality Control Orders (QCOs). This negates the advantage of pre-arrival processing. The solution lies in fully implementing Section 11(3) of the Customs Act (2018) to create a single, centralized repository for all regulatory mandates across ministries.
2. Expanded Advance Rulings: Ambiguity, particularly around Rules of Origin under FTAs, hampers trade. Expanding the scope of Customs Advance Rulings under Section 28-H(2) would allow businesses to seek binding clarifications on how regulations apply to them. This requires better coordination between the customs authority and relevant ministries.
3. Replacing Pre-Scrutiny with Post-Clearance Audits: The current advance scrutiny by the Special Valuation Branch for related-party transactions can drag on for years, creating planning nightmares. This should be replaced with a post-clearance audit system that verifies compliance after goods move, with statutory time limits to prevent indefinite uncertainty.
4. Empowering Trusted Traders via AEO: The globally recognized Authorized Economic Operator (AEO) programme should be the cornerstone of a more sophisticated, entity-based approach. Certified, reliable traders should enjoy greater benefits, including mutual recognition under FTAs, self-licensing for export permits, and exemptions from routine port examinations.
5. Smarter Risk Management and Compliance: The current risk management system needs refinement to reduce false positives (delaying compliant shipments) and false negatives (missing violations). A more nuanced categorization of non-compliance, based on intent and impact, should trigger tailored responses—from education to enforcement—with transparent processes for dispute resolution.
Conclusion: Customs as a Strategic Policy Instrument
As global trade fragments into competing blocs, India's customs system must evolve from a mere checkpoint to a strategic policy instrument. The five reforms outlined—spanning tariff rationalization, information clarity, procedural certainty, trust-based facilitation, and intelligent compliance—represent a comprehensive blueprint. Their implementation, undertaken with urgency and ambition, can position India as an agile and competitive player, ready to seize opportunities in a reordered global economy and secure its national trade interests against mounting external headwinds.
