India tinkers with import duties to reduce trade deficit

With the aim of reducing India’s trade deficit, boost domestic manufacturing and to support the rupee the government has increased customs duty on 19 “non- essential items” including washing machines, refrigerators, radial tyres, and aviation fuel.

Last week, the government’s announcement of hiking import duties on select consumer goods and aviation fuel is primarily meant to help narrow the current account deficit (CAD) and reduce pressure on the Indian rupee, which has become Asia’s worst performing currency, having lost nearly 15 pc against the US Dollar in the last three months.

While announcing the hike, the government was keen to highlight that the new duties are well within the norms of the World Trade Organisation (WTO) and are aimed at protecting the domestic industry and boost the economy, said the commerce industry.  Commerce secretary Anup Wadhawan said, “Developing country’s infant industries’ need protection. Our bound (duty rates) in the WTO have been shaped in that philosophy.”

But none of the two stated objectives are likely to be met by this announcement, which is mere tinkering with India’s current account. According to the Ministry of Finance, the total value of imports of these items stood at INR 860 billion in 2017-18, or less than three percent of the country’s merchandise import bill during that period. The increased duty is likely to yield around INR 40 billion in revenue. Also, vis a vis protection of the domestic industry, the objective is less than likely to be met as in several segments the demand outstrips supply and this is especially true with the higher value consumer goods such as modern air conditioners. Kamal Nandi, business head & executive vice president – Godrej Appliances said, “The increase in customs duty from 10 pc to 20 pc on home appliances will go on to promote domestic manufacturing and is aligned with the government’s initiative of Make In India. However, for some category segments – particularly air conditioners, this will lead to an adverse impact as the capacity built up in the country at present is not adequate to meet the current demand of the market.”

India’s CAD had widened to a four-quarter high at 2.4 pc of GDP in April-June from 1.9 pc in January-March quarter. Analysts believe that the duty hikes will hardly have any significant impact on curtailing the size of the CAD in 2018-19. This move comes at a time when Goods & Services Tax (GST) collections have shown little signs of improvement in the past few months.

“Further, due to the recent depreciation of the rupee, the prices of air- conditioners, refrigerators, washing machine and microwave ovens got dearer by 3.5–4 pc, depending on the content of imports across categories. Any further devaluation of the rupee coupled with this hike in customs duties, therefore puts immense pressure on the prices of ACs,” added Nandi.

However, the Consumer Electronics and Appliances Manufacturers Association (CEAMA) is of the opinion that the increase in custom duty from the existing 10 pc to 20 pc on ACs, refrigerators and washing machines will encourage domestic manufacturing.  The duty hike and depreciating rupee will act as a deterrent for importers now and is assumed to be good for local manufacturers. The Make-in-India programme, aimed at boosting domestic production, has hardly worked in this domain as is seen by imports of electronics now averaging nearly USD 5 billion a month.

The domestic manufacturing in India is not just low because of low import duties but is also due to the failing standard of quality and consumer expectations. The manufacturing costs are higher in India because the goods are not wholly manufactured on the floors of a single factory and many critical parts continue to be imported.

Will it impact the festive sales?

The consumer durable industry is of the view that the hike in custom duty to 10 pc on compressors, used for air conditioners and refrigerators, can be a “set back” and may have an impact on the coming festive season sales. The month of October and November has festivals lined up in India and e-commerce sites have planned to come up with several offers to lure customers. However, analysts are of the opinion that prices of these goods will not be affected greatly as the products that will go on sale during the festive season were imported before the announcement.

IKEA, the Swedish furniture giant told an Indian media that the import duty hikes will push up costs in India and could hamper their business. “Trade barriers such as import duties are against ideas of a global economy and ease of doing business and will lead to higher costs in India, which is not customer friendly,” said deputy country manager Patrik Antoni, who reports to Ikea India CEO Peter Betzel.

Flying will be costlier

The new five per cent duty on aviation turbine will perhaps increase the cost of travel for the common man. The already financially strained airline sector may face the brunt of increased costs on their margins. In 2017-18, ATF imports were 0.03 pc of total imports in value terms (in US dollar).

According to some estimates, the five per cent hike will mean a minimum increase in monthly fuel bill by INR 250 million for airlines. This will further dent the profits of Indian airlines that are already struggled to stay profitable despite filling nearly 90 pc of seats and seeing a more than doubling of domestic passenger numbers over the last four years.

India has one of the cheapest domestic airline markets in the world and according to aviation consulting firm CAPA India, the Indian airlines are expected to post combined losses of up to USD 1.9 billion this financial year.

Of the 19 items on which import duty has been hiked, it won’t have a huge impact on the CAD as the largest share of India’s import basket has traditionally been taken by petroleum crude and in 2017-18, this was close to USD 90 billion, about a fifth of the country’s total imports. With crude oil prices moving at four-year highs, Indian trade deficit is bound to increase in this fiscal, hurting the rupee further and pushing it into a vicious cycle.