Choosing the right target is as much as a skill as is hitting it. (Photographer: Taylor Weidman/Bloomberg)

Higher Import Duties: Has The Government Picked The Right Targets?

The government on Wednesday announced a decision to increase customs duty on 19 items to help bring down India’s current account deficit.

Most of the items where duties have been hiked are consumer goods, which have a relatively low share in India’s total imports. For now, the government has avoided commodities like gold, steel and coal. Imposing higher duties on some of these items would have made a larger dent in the country’s import bill, but may have led to unintended repercussions such as higher inflation and, in the case of gold, increased smuggling.

The total share of the 19 commodities chosen by the government is between 2.5-3 percent, say economists. The items include some categories of gems and jewellery, consumer durables like refrigerators and washing machines, footwear, luggage items and air turbine fuel among others.

The higher duties could help in the short term but are not a long term fix for the current account deficit, wrote Pranjul Bhandri, chief India economist at HSBC.

Our import model estimated over the last decade does find higher import tariffs to be economically and statistically significant in lowering real imports. However, the quantum of its impact is limited. It may not be a permanent or a complete solution to India’s CAD woes.
Pranjul Bhandri, Chief India Economist, HSBC

Response To Surge In Imports?

The cumulative imports across 15 of the 19 items has risen from $4.9 billion in 2016-17 to $ 8.5 billion in 2017-18. Categories of cut and polished diamonds, semi processed and lab grown diamonds and cut and polished coloured gemstones were not included in the annual comparison since their categorization has changed and figures are not directly comparable.

The sharp jump seen in the last financial year came largely from three categories: air conditioners, articles of jewellery and articles of goldsmith and silversmith. The share of these items in total imports has also risen.

Share of Jewellery rose from 0.08 percent in 2016-17 to 0.39 percent last year and share of wares made from precious metals increased from 0.01 percent to 0.29 percent in 2017-18. In the case of air conditioners, the share of imports has seen a more gradual rise.

India’s total import bill rose from $384 billion in 2016-17 to $465 billion in 2017-18.

The government hopes that by increasing customs duty, it will either dampen demand for these items or allow for substitution with domestically produced goods.

Import demand for consumer goods may respond because of an elasticity closer to 1.5 times the change in price, said Tushar Arora, senior economist at HDFC Bank. “The impact will be aided by currency depreciation but is unlikely to leave significant impact on the overall import bill of the country,” Arora said.

An average increase of 5 percentage points in custom duties would reduce the import bill by around $1 billion. It is unlikely to have a material impact on the overall import bill of the country.
Tushar Arora, Senior Economist, HDFC Bank.

Fallout On Exports?

Experts also cautioned that in the jewellery categories, higher tariffs may inadvertently end up hurting exports too.

Import duty on precious stones saw a hike from 5 percent to 7.5 percent. Jewellery and precious artifacts saw a relatively sharper hike from an existing 10 percent to 15 percent. Rough diamonds, which hold the largest share of this category, were excluded, leaving a small share of precious stone items in the overall imports.

In a report, Bank of America Merrill Lynch said that the move was unlikely to have an impact unless accompanied by higher duties on gold imports.

We do not also see 2.5 to 5 percent increases in import duties materially curtailing import demand for precious stones and jewelry. To the extent some of these are re-exported, the impact on the current account deficit is even more limited.
India Economy Watch, Bank of America Merrill Lynch Global Research 

What Was Left Out?

While announcing higher duties, the government stayed away from items like gold, coal, steel and mobile phones.

Aditi Nayar, economist at ICRA explained that the decision to stay away from duties on inputs like coal and steel may be linked to the wider inflationary impact such commodities can have. In the case of gold, concerns about smuggling when higher duties are imposed remains a valid one, she said.

Despite worries about the surge in mobile phone imports, the government is yet to move on higher tariffs on that category.

Also read: Stronger Capital Goods Imports Adding To India’s Current Account Deficit Woes