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49% above international prices. The d, estic to international price ratio (NPC) for inputs decreases from 1.58 in tha ..irst category (non-exporters) to 1.38 for substantial exporters, as shown below: Tflse 2: Iict of IrPut CoStS **rd** **_Taxes_** am Profitability

|Export<br>Category|Averi<br>IrFoutNPC|Inpujt**Taxes as**X<br>ofgutoutIntnt. Price|Adjusted Pr<br>Internatioml|ofitabiLity<br>**_/g_**of<br> <br>Price<br>over:|
|---|---|---|---|---|
||||FulkCost<br>|1laralnAtCost<br>|
|Mor-q|1.58|39.0|-0.7|28.2|
|<br>Potential|1.43|14.6|30.5|56.8|
|Marginal|1.413|27.3|2.2|28.7|
|<br>Significant|1.38|21.1|8.1|36.7|
|Overall|1.49|30.3|6.0|34.2|

**/I** Adjusted by remving **taxes** x price surcharge from irput costs. Source: Arwex II.

The additional costs stemming from the higher input prices represent on average 30% of the output's international price. This cost handicap is significantly higher for the non-exporters (39%), and markedly lower for the potential exporters (only 14.6%) due to their high Value Added content and their use of relatively cheap domestic resource-based inputs (e.g., Maize, Aluminum). 11. A simulation of the "tax-free" production costs (excluding the surcharges paid for inputs, i.e., the tariffs on imported inputs, the price differentials on local ones, and the non-deductible excise taxes) indicates that the competitiveness and profitability of the projects relative to international prices would be greatly enhanced by eliminating these surcharges. Practically all projects which had a negative marginal profitability on international prices would generare a positive tax-free marginal profitability under such conditions. Furthermore, the pro?ortion of projects which would ear from international prices a positive profit on their full production cost wo, i triple (from 20% to 63%). In the category of non-exporters. this proportion would increase dramatically from 0 to 50%, i.e., half the projents which have no prospect nor potential for export under the present circumstances could become substantial exporters with a reasonable positive profit margin if they could procure their istputs at international prices. It confirms the major finding and recommendation of the Zxport Strategy Report, regarding the critical importance of access to inputs at international prices for any successful export policy.

# Impact of Investment Costs on Value Added and Effective Protection

12. One uncomoon feature of India's protection structure is the high lerel of customs tariffs and taxes levied on imported capital goods. Correlatively, the domestic capital goods industry supplies the rest of the industrial sector at prices generally higher than international prices for comparable capital goods. Moreover, the price ratios for capital goods increase with the technology level of capital goods and equipment (e.g., CNC machine-tools have NPCs exceeding 2 as compared to 1.2-1.4 for standard machine-tools). 13. The high cost paid by Indian industrial projects for their capital goods (either local or imported) implies that the projects' Value Added in domestic prices should normally include a larger amount of capital ren'imeration (interest, depreciation, and return on fixed assets). This by itself contributes, ceteris