The hidden tax on Indian exports
India loses export markets for many reasons, like logistics, tariffs, trade barriers, and geopolitics.
But there is one often overlooked reason: Subsidies and inefficiency.
This ‘hidden tax’ travels along with our exports, inflating prices without adding productive value.
This goes against the global dictum: “You can’t export taxes”.
Correcting these internal distortions may be better than reducing our margins.
In fact, merely changing the way we allocate and price domestic systemic costs for exports could significantly enhance competitiveness, without loading any additional burden onto domestic consumers.
And this will be WTO-compliant.
Power tariff cross-subsidization: The most visible distortion
The clearest example lies in electricity pricing.
Across states, a familiar structure prevails:
- Free or subsidized power for agriculture
- Discounted tariffs for low-income households
- Funds diverted from DISCOMs
To bridge the gap, industry, commercial users, middle classes and the rich are charged tariffs far above cost, often 2 to 3 times actual cost.
From a welfare standpoint, subsidizing vulnerable segments is legitimate.
But when these subsidies are loaded onto industrial tariffs, export manufacturers end up carrying our internal welfare costs into global markets.
Export costs do not burden domestic consumers
A likely objection will be: Won’t lowering export input tariffs shift costs onto domestic consumers?
The answer is a firm “No”.
Export production represents incremental output: goods produced over and above domestic demand.
The additional power, logistics, and working capital costs arise purely because of export orders.
Standard industry practice is, such incremental costs are built into export pricing and passed on to foreign buyers.
Just as firms price large bulk domestic orders based on marginal production costing.
The problem of competitiveness arises because input tariffs themselves are inflated by cross-subsidies unrelated to exports.
When these get embedded into export pricing, Indian goods become artificially expensive globally.
If the export orders were not there, Indian customers would have had to bear these extra costs, anyway.
By adding our internal systemic costs on export orders, we would only end up not getting the export orders, and consequently, not subsidizing our domestic constituency through export.
So, we are not doing any favour to the foreign buyers by not making them share these costs, for which they are in no way responsible.
Protect welfare without hurting exports
Correcting this imbalance does not mean withdrawing subsidies.
It means funding them differently and pricing exports rationally.
Export-oriented manufacturing units can be supplied power closer to actual cost rather than at cross-subsidized tariffs.
Subsidies, where necessary, can be funded transparently through state budgets instead of being loaded onto industrial users.
Export-linked rebates, easier renewable power access, and dedicated industrial feeders can further reduce embedded costs while preserving welfare commitments.
Rail freight subsidizes passengers through exports
Electricity is only the most visible distortion.
Railways keep passenger fares politically affordable while compensating through higher freight tariffs.
Bulk exporters, like steel, cement, and agri-products, bear this burden.
When inland freight costs rise, they flow directly into export pricing.
India’s logistics costs stand at roughly 13–14% of GDP, compared to 8–9% in developed economies, a structural disadvantage unrelated to manufacturing productivity.
Logistics & port inefficiencies: Cost without value
Exporters also absorb systemic process inefficiencies:
- Port congestion and vessel delays
- Container detention charges
- Handling costs above regional hubs
- Clearance delays
These are not production costs; they are system costs.
Yet they get priced into exports, eroding competitiveness without enhancing product value.
We should find a way of not loading these on exports.
Otherwise, we will neither get the export orders, nor fund these costs.
Industrial land & infrastructure loading
Industrial land pricing in many states includes heavy infrastructure loading, like development charges, conversion fees, and stamp duties.
Public infrastructure costs thus get embedded into private manufacturing capex, which flows into export pricing.
Competing export hubs distribute such costs within industrial zones.
Why should importers bear these costs?
Municipal levies: The invisible Opex layer
Industrial units also bear elevated municipal charges:
- Water tariffs
- Sewerage fees
- Property taxes
- Local trade levies
Individually modest, but collectively they add up, and are ultimately embedded into export pricing.
Compliance & regulatory overheads
India’s multi-layered compliance regime adds administrative Opex:
- Inspections
- Renewals
- Certifications
- Consultant management
Even compliant firms incur transaction costs global competitors often avoid under single-window systems.
Financing & working capital distortions
Exporters face additional financial burdens:
- Interest rates far higher than competitors, esp ASEAN peers
- GST refund delays
- Duty drawback lags
- Port clearance working capital lock-ups
These inflate cost structures independent of production efficiency.
The structural insight
India does not lose export competitiveness only at foreign borders; it loses it within its own cost architecture.
Electricity, freight, logistics, land, municipal levies, compliance, and financing inefficiencies together form layered cost burdens that exporters price into global markets.
A powerful but simple reform lever
This is where a transformative lever exists.
India can enhance export competitiveness significantly simply by changing how domestic systemic costs are allocated and priced for export production.
With almost just a sleight of hand.
Not by withdrawing welfare.
Not by subsidizing exports recklessly.
But by ensuring exporters do not carry unrelated domestic burdens into global markets.
Such a revised Export-Pricing Policy:
- Does not increase domestic consumer cost
- Does not dilute welfare support
- Can remain WTO-compliant if structured prudently
- It merely ensures that export prices reflect real production economics
A bonus dividend: Exposing the cost of inefficiency
Separating export cost structures from domestic cross-subsidies creates transparency around systemic inefficiencies.
When electricity tariffs, freight rates, logistics charges, and compliance costs are disaggregated, policymakers are forced to distinguish between genuine supply costs and embedded inefficiencies.
Transmission losses, port dwell times, administrative overheads, and infrastructure leakages, hidden within bundled pricing, become visible and measurable.
This visibility can trigger a second wave of reform: reducing system losses, improving governance efficiency, and rationalizing tariffs more broadly.
Export competitiveness reform thus becomes a catalyst for domestic efficiency reform, with long-term benefits for industry and consumers alike.
Conclusion: Competitiveness begins at home
India negotiates hard at global trade tables.
It must reform just as hard within its domestic cost architecture.
Export success will not come merely from trade diplomacy, but from how intelligently India prices power, freight, logistics, land, finance, and compliance.
If systemic inefficiencies and welfare cross-subsidies continue to travel invisibly within export pricing, trade agreements alone cannot deliver competitiveness.
But if India separates social support from export costing, funding welfare transparently while pricing production rationally, it can unlock a powerful dual dividend:
- Stronger global competitiveness
- Deeper domestic efficiency
India would then export more goods, and fewer inefficiencies.
Let us become globally competitive, by not exporting inefficiency.
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
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