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If taxes on input items exceed that on finished products, it is supposed to discourage manufacturing in a country and to remove such inconsistencies, the Union government has begun an exercise to review its trade agreements in ASEAN, The Economic Times has reported.

According to the US Trade Representative office data, the ASEAN is a trading block with a population of 64.7 crore inhabitants and a GDP of $2.9 trillion. The countries that form the ASEAN are Singapore, Thailand, Malaysia, Vietnam, Indonesia, Cambodia, Laos, Myanmar, Brunei Darussalam, and Philippines.

This exercise will put under the lens imbalances in import duties, rules of origin and non-tariff barriers. Various industries have also been urged by the Union commerce and industry ministry to pinpoint products where local manufacturing is at a disadvantage due to inverted duty structure, which basically implies a situation where the taxes on inputs are higher than that on finished goods.

India’s agreement with the ASEAN came into force in 2010 and will end in 2025.

“One round of physical negotiations has happened, and we have agreed on modalities of the overall review process of the pact. Both sides have different sets of expectations but at the end of it, we want deeper trade,” an official, who preferred anonymity, told the newspaper. The process of collecting data on the inverted duty structure has also begun.

India’s trade deficit with the ASEAN is growing to the country’s discomfort. The gap was $500 crore in 2010-11 and $966 crore in 2016-17 but rose more than 450% to reach $4,357 crore in 2022-23.

India’s quest for domestic manufacturing has been hobbled by such factors despite the government trying to step on the gas with the help of several measures such as PLI (production-linked incentive) schemes, higher import tariffs, and import monitoring.

India’s policymakers are concerned that third countries are routing their exports through ASEAN members to exploit duty benefits available under the agreement.

“It is an offensive interest of India to correct the anomalies and gauge the challenges on duty, rules of origin and non-tariff issues. How much we will be able to correct, the contours of that would be decided,” the bureaucrat said.

The list of items where India clearly faces a constraint due to the skewed duty structure contains some ferro alloys, aluminium, copper pipes and tubes, textile staple fibres and some chemicals.

Ajay Sahai, director general of Federation of Indian Export Organisations, thinks that it is crucial to examine the inverted duty structures in free-trade agreements. This is all the more imperative if the sources account for a substantial share of the overall imports.

Under the existing agreement, the two sides agreed to gradually eliminate duties on about 75% of goods and reduce tariffs on around 15% goods. However, the member countries of the ASEAN made different tariff elimination commitments. For example, Singapore offered almost 100% tariff elimination, but Vietnam committed to less leading to a varied duty structure in the agreement.

Experts feel it is more convenient to address such duty anomalies while conducting annual budget exercises for imports under the Most Favoured Nation (MFN) principle. “However, with the increase in FTAs, which typically remove import tariffs on most finished products, correcting this imbalance has become nearly impossible. The ASEAN India FTA is no exception. Tariffs are already zero on most industrial products,” said Ajay Srivastava, who is the co-founder of Global Trade Research Initiative, an economic think tank.