Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Rupee Rout Prompts India to Raise Taxes on $12 Billion of Goods

(Bloomberg) -- India raised customs duties on products ranging from aviation fuel to footwear as it seeks to narrow the current-account deficit and support the rupee.

The taxes on 19 items, imports of which were valued at 860 billion rupees ($12 billion) in the financial year ended March, will be effective Thursday, the finance ministry said in a statement Wednesday.

A current-account deficit at a five-year high is a key vulnerability for the economy and one of the reasons why the rupee has been the worst-hit in Asia amid an emerging-market rout this year. The move follows similar steps taken by Indonesia -- which also runs a current-account gap -- to raise taxes on imports of luxury goods like cars to consumer products and delay import-heavy infrastructure projects.

While Indonesia’s rupiah has lost about 9 percent against the dollar this year, India’s rupee has dropped more than 12 percent, as rising oil prices push the nation’s trade deficit wider and fuel inflation.

Prime Minister Narendra Modi’s government had asked ministries to finalize plans to reduce inbound shipments of electronic goods such as mobile-phone components and some petroleum products and capital goods, people familiar with the development said Tuesday. The plan is to reduce imports of these items by 1.5 percent to 4 percent, the people said.

Below are some of the major items that will attract higher import tax:

ItemsNew Tax (%)Old Tax (%)
Air conditioners, household refrigerators, washing machines less than 10 Kg 2010
Aviation turbine fuel50
Articles of jewelry2015
Cut & polished colored gems, semi-processed and lab grown diamonds7.55

Citigroup Inc. economists Samiran Chakraborty and Anurag Jha estimated the goods targeted with higher taxes represent 0.5 percent of gross domestic product and could be beneficial in helping to rebalance demand, depending on how responsive consumers are to higher prices and whether the products can be replaced with domestic goods.

“That said, with the fiscal 2019 current-account deficit quite wide at $88 billion or 3.2 percent of GDP, more efforts may still be needed including on the exports front to get the current account deficit into the comfort zone,” they said.

©2018 Bloomberg L.P.