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!aLbtL: Effects **of** Proposed Tariff **Chane** on CQVetitiv noss **ad** Profitability, by Product Group **/,j**

||SSnAtd|Output NPC|Pro<br>Damestic|fitabititv<br>**(X)**<br>Int*rnati<br>|of<br>onal<br>Price<br>|||
|---|---|---|---|---|---|---|---|
|||<br>Rdti|Price|Futl Cost|**Moral**Cost|**CNPR**|CEPR|
|Product GrotYY||eucon<br>**X**||<br>**(X)**|<br>**(X)**|<br>**(X)**|**(X)**|
|BY Export Category|<br>|**()**||<br>|<br>|<br>||
|None<br>|1.25<br>226<br>||10<br>|**-25**<br>|0<br>|33<br>|15<br>17|
|Potential<br>|0.91<br>|.9<br>|11<br>|16<br>|40<br>|28<br>34|9|
|**warginel**<br>|1.40<br>|4<br>|9<br>|-23<br>*|2<br>|<br>|7|
|Significant|1.33|-11|16|10|16|24||
|SB Subsector||||||||
|Heavy**Chemicals**|1.51<br>|**-31**|**t5**<br>|-25<br>|7<br>|30<br>|12<br>|
|Synthetic**Yarns**|1.22<br>|-44<br>|13|**-14**<br>|14<br>|**32**<br> <br>|20<br>|
|**Uasic Steel**Goods<br>**Average**Interwedtes|1.<br>3<br>1.40|25<br>-33|a<br>13|-26<br>**-23**|-3<br>7|3<br>a<br>**32**|t<br>**15**|
|Light**Chesicals**|1.13<br>|-9<br>|19<br>|1<br>|23<br>|23<br>|7<br>|
|Electronics<br>|1.22<br>|**-10**<br>|11<br>|-18<br>|3<br>|29<br>|2<br> <br>|
|Food Industries|1.06<br>|-4<br>|**21**<br>|-20<br>|13|29<br> <br>|<br>5<br>|
|**Other Engineering**<br>**Average Final Goods**|1 07<br>1.20|t2<br>**-8**|6<br>11|1<br>**-12**|**11**|L<br>3<br>**28**|A<br> <br>**11**|
|Overa**Average**|1.27|**-15**|12|15|10|30|<br>13|

/I In this table, **NPRs are** weighted by Output<sup>in world prices,</sup><sup>**nd**CEPUs</sup><sup>**by**VAin</sup><sup>**world**prices.</sup> Source: **A-wxeex** VilI **and** IX.

Under the proposed tariffs for inputs and capital<sup>goods, the competitiveness</sup> and profitability of the projects relative<sup>to international prices would be</sup> significantly enhanced. The output prices<sup>yielding unchanged profit margins</sup> would decrease on average by 15% (-33%<sup>inIIs industries),</sup> and the average price competitiveness (measured by output NPCs) would increase by a similar amount (44 percentage points in synthetic yarns).<sup>Price competitiveness</sup> would greatly increase in final goods industries where prices<sup>would be only 20% above current</sup> international prices on average (7% in general engineering industries).<sup>Though</sup> only one-fourth of all projects would earn a positive<sup>profit from international</sup> prices on their full production cost (as compared<sup>to one-fifth originally),</sup> the proportion of projects which would have a<sup>positive profitability on their</sup> marzinal cost would reach 60%, implying that<sup>some 7% of the projects would switch</sup> from a negative to a positive marginal profitability<sup>and thus would have an</sup> incentive to begin exporting a marginal share<sup>of their production. Moreover,</sup> output NPRs would come closer to CNPRs, and the<sup>incentives</sup> provided by the actual and compensatory effective protection would not only be more homogeneous between export-orientation categories and between<sup>subsectors but also induce higher</sup> efficiency (the average CEPR would drop from<sup>about 35% to 13%). Finally, the</sup> enhanced profitability of international prices<sup>for Indian industries would</sup> reduce, or even abolish, the need for CCS<sup>and other cash incentives for exports</sup> made by industries with a competitive<sup>advantage.</sup>

# Conclusions and Suatestions (Summary)

35. The selected sample of some 60 DFI industrial<sup>projects</sup><sup>**financed in 1988 and**</sup> 1989 is not representative tf India's diversified industrial sector.<sup>However,</sup> due to the sample's focus on engineering industries<sup>and on chemical and related</sup> industries, it is reasonably representative of these two **subsectors which have** received a major part of the investments<sup>and incentives for development in India</sup>