Follow Ricardo’s advice and lower tariffs on medical equipment

As every year before the budget, the finance minister is besieged by diametrically opposed demands from various segments of the industry. For example, domestic producers ask for tariff increases, and transnational corporations for tariff reductions.

What decision will he make?

Honestly, it’s not easy. Why?

Because there is a lot of rhetoric and it is difficult to distinguish rhetoric from reality. And one false step costs the country.

Fortunately, there are examples from the past of how other governments have navigated similar crossroads. Let’s discuss one that was negotiated with the help of renowned economist David Ricardo.

Corn Laws

At the turn of the 19th century, grains dominated the landscape. The business world was divided into two opposing camps – the landed, grain-growing aristocracy and the growing industrial (capitalist) power. As the population grew, grain prices rose. Even low-quality grain sold at a premium! This inflation burdened the common man, and the industrialist also had to pay his workers more, since the price of food largely determined the cost of labor.

Worried about grain prices, industrialists began importing grain from other countries. This caused prices to fall, but local landowners’ moods rose. Competition intensified, reducing landowners’ profits and forcing them to match the quality of imported grain.

Using their overwhelming power in Parliament, the landowners passed the Corn Laws. These laws were an ironclad system of protection through high tariffs, which even rose as the price of foreign grain fell!

But the Napoleonic war and several failed harvests caused the bug to start to rot and stink. However, the landowners still controlled parliament. Who ruled that the duty on grain should be even higher! The rationale was that higher prices in the short term would encourage more local grain production in the long term!!

Grain inflation reached break-through levels. Parliament was flooded with petitions from ordinary people and industrialists.

David Ricardo, England’s leading economist, sided with the “hard-working industrialists” and launched a persuasive and persistent campaign to lower tariffs. Eventually, Parliament repealed the Corn Laws and cheap grain was freely imported into Britain.

Tariff dilemma

The case of medical devices, I think, is somewhat similar to the historical case of Grain. Almost 80% of medical devices used in India are imported. The current ecosystem supports manufacturing of products with limited engineering complexity or products that emerge from the breakdowns of other sectors where India is already strong. In both these segments, India is doing well.

The basic level of duty is between 7.5% and 10%, to which are added ad valorem tax (5%), higher education cess (1%) and GST (12-18%), which adds up to between 26% and 34% in fair taxes. Perhaps the protectionist instinct fueled by baseless claims in the sector got the better of us at some point and that is why we have such high duties. The burden of duty is ultimately borne by the patient.

In comparison, tariffs in neighboring South Asian countries are around or below 5%. This disparity serves as a useful point of comparison and highlights a major risk: the increased likelihood of smuggling. Such illegal activities not only result in lost tariffs and taxes for the government, but more importantly, they expose patients to products that lack legal and service guarantees.

In the interests of quality and affordability, promoting competition, maintaining pragmatic equality through neighbourly tariffs, taking advantage of international trends that generate most of the investment in research and development, production and market development, there is a need to reduce tariffs on all products that cannot be substituted by imports in the short and medium term.

The Finance Minister must assess the groups’ track record, draw lessons from historical precedents and our experience with tariffs, and propose evidence-based measures in the upcoming budget.

The author is the chairman of MTaI (Medical Technology Association of India)