Stacked boxes sit loaded on an outbound truck. (Photographer: Ruhani Kaur/Bloomberg)

Government Hikes Basic Customs Duty On 19 Items To Curb Imports 

India will increase the import duty on 19 items, including air conditioners and washing machines, in an attempt to curb imports that would help in bridging the widening current account deficit and reduce pressure on the rupee.

The increase in rates of basic customs duty will be effective from midnight today, according to a statement by the Finance Ministry. The total value of imports of these items in 2017-18 was about Rs 86,000 crore.

Import duty on air conditioners, refrigerators and washing machines under 10-kilogram capacity has been doubled to 20 percent each from 10 percent earlier. The basic customs duty on radial tyres is now 15 percent compared with 10 percent earlier, while the levy has been hiked to 25 percent from 10 percent on footwear. The government also introduced an import levy of 5 percent on the aviation turbine fuel.

Here’s the full list of items on which tariffs have been increased:

A higher oil import bill along with strong growth in non-oil non-gold imports have led to a wider trade deficit for India. While export growth has picked up in recent months, it has remained below the rate of growth of imports. leading to a widening of the trade gap. The merchandise trade deficit in the April-August 2018 period stood at $80.35 billion compared to $67.27 billion in the same period last.

How Much Will It Help?

Not everyone is convinced that import curbs will help in materially reducing the current account deficit or break the fall in the Indian currency. Besides, they can prove to be inflationary.

The impact of these import duty hikes would be less than 10 basis points on the current account deficit, Soumyakanti Ghosh, chief economic adviser at SBI, told BloombergQuint. “These steps and the ones announced earlier are mostly long-term in nature. From that point of view it may improve sentiments in the short term,” Ghosh said. “But as long as the larger problem of reducing dollar demand and increasing dollar supply are not addressed, the rupee will remain under pressure.”

A number of the items included on the list by the government are not extremely price sensitive, explained Ajay Dua, former secretary of the Department of Industrial Promotion and Policy. He said that both ATF and the jewellery items on the list may not be impacted much by the duty hikes. In the case of jewellery items like cut and polished diamonds, India may be using these for eventual exports of jewellery. To that extent, the duty hikes may end up hurting a labour-intensive industry, he added.

Dua also suggested that the government could consider increasing its revenue collections by increasing duty on some high-value items like gold, high-end mobile phones and even thermal coal which India has been importing in large quantities.

Jahangir Aziz, chief emerging market economist at JPMorgan also felt that the current account deficit cannot only be analysed using the import-export imbalance. Aziz believes that the current account deficit should be viewed as an imbalance of savings and investments. As such, correcting it will need adjustment on atleast three fronts - monetary policy, fiscal policy and exchange rate.

Breather For The Rupee?

To be sure, the import duty hikes could marginally help in soothing sentiments in the currency markets. This is second set of measures announced by policymakers to curb the fall in the rupee, which has depreciated by nearly 12 percent so far this year.

On Sept. 14, the government announced measures to attract capital flows including:

  • Easing of mandatory hedging conditions for infrastructure loans.
  • Permitting manufacturing sector entities to avail external commercial borrowings up to $50 million with a minimum maturity of one year versus the earlier period of three years.
  • Removing exposure limits of 20 percent of foreign portfolio investors’ corporate bond portfolio to a single corporate group, company and related entities.
  • Exemption from withholding tax for issuance of Masala Bond issues done in FY19.
  • Removal of restrictions on Indian banks’ market making in Masala Bonds, including restrictions on underwriting of such bonds.

Despite those announcements, the rupee moved back to towards record lows of 73 against the dollar. It closed at 72.62 per dollar on Wednesday.

Watch the discussion with Vijay Sales’ Nilesh Gupta, Former Commerce Secretary Ajay Dua and SBI’s Soumyakanti Ghosh here: