The Tax We Levy On Ourselves
| AUTHOR | Anupam Manur |
| DATE | August 27, 2026 |
| CATEGORIES | Trade Economic Policy |
The incidence of a tariff is among the first things taught in any trade course, and it bears restating because it is so routinely forgotten in public debate. A tariff is a tax, and someone has to bear it. Two parties usually do: the foreign producer, who receives a lower net price than he otherwise would, and the domestic consumer, who pays a higher one. The domestic producer gains and that is the entire purpose of the instrument. Whatever else one thinks of protection, it is a transfer, and the transfer runs inwards.There’s also a little bit of government revenue earnt.
Incidences of tariffs are established, but let’s run the same analysis on the incidence of regulation. To build a factory on agricultural land in most Indian states, a certificate permitting the change of land use is required. In many states, leasing the land instead is not permitted. Ceilings restrict how much land any one individual may own. Hiring more than ten employees brings an entirely new body of labour law into play. Each of these carries a cost in money and in time, and someone has to bear that too.
Here, the incidence runs the other way and the domestic producer bears it. So does the domestic consumer, who either pays more or goes without. The foreign producer bears nothing at all, and in relative terms gains, since his Indian competitor is now carrying weight that they are not. Crucially, the Indian producer is bearing this cost in the Indian market, and in every export market as well.
Shruti Rajagopalan calls this our regulatory cholesterol. In the language of the trade classroom, it is a tariff with the sign reversed: the same effect on prices, with nobody at the receiving end of the transfer. There is no protected industry at the end of it. There is a department that issues certificates and rent-seeking that comes along with the discretionary power.
The two then compound each other. If domestic costs are elevated for reasons that have nothing to do with foreign efficiency, the tariff required to keep an Indian firm viable is higher, and it can never be withdrawn, because the firm was never going to become competitive in the first place. Protection intended to be temporary becomes permanent, which is a fair summary of Indian industrial policy since Independence.
For instance, a tariff on Chinese T-shirts does not make an Indian T-shirt cheaper; it makes the Chinese one costlier. The Indian consumer absorbs the difference, and the Indian producer is no closer to selling a shirt in Nairobi or Rotterdam, because export markets are entirely indifferent to our tariff schedule. Protection can secure us our own market, at best. It cannot secure us anybody else’s, and the growth model we keep saying we want depends on everybody else’s.
More often than not, protectionism cannot even secure us our own markets because the firms become inefficient due to lack of competition and consumers find other alternatives.
India’s weighted average tariff on imports from the world is around 12 per cent, significantly higher than most of our trading partners. A substantial share of that falls on intermediate goods, which are the inputs our own exporters have to buy. At that point protection ceases to be a transfer to domestic producers and becomes a cost imposed upon them. The wall built to shelter Indian manufacturing is, at the input stage, part of what is clogging it.
The prescription follows directly enough. Lowering our own tariffs is not a concession to be bargained away in a negotiation; it is a reduction in the cost base of Indian manufacturing, and worth doing whether or not anyone reciprocates. And the thicket around land, leasing and labour is a tariff we have levied on ourselves, one that no foreign government has ever had to be persuaded to lift.