The government raised import duties on 19 non-essential items recently.
Why it was done?
It is aimed at bridging current account deficit (CAD) in order to save Indian rupee from the incessant fall it has seen in the recent past.
The CAD widened to 2.4% of the GDP in the first quarter of 2018-19.
The total value of imports of 19 non-essential items in the year 2017-18 was about Rs 86,000 crore.
Hence, basic customs duties have been raised on these 19 tariff lines by 2.5-10%.
This will hike the prices of those imported goods, dampens the domestic demand, lowers the imports and helps local manufacturers.
The increased duty is likely to yield about Rs 4,000 crore in revenue.
What could be the effects?
The Centre’s stated objective of narrowing the CAD cannot have a bigger impact only with this measure.
Though the items import values stood out at 86,000 crores, it constitute less than 3% of total merchandise import bill in 2017-18.
The first six months of the current fiscal have already been elapsed.
Thus containing the CAD through this tariff increase is going to be short-term and marginal.
The decision to double import duties on a clutch of consumer durables to 20% could dampen consumption of these products.
Thisis especially coming at a time when the rupee’s slide against the dollar is already likely to have made these goods costlier.
Since higher duties triggers higher prices, it might end up altering consumption behaviour towards this category of imported merchandise.
The government should also be in a position to foster greater investment in the domestic production of some of these goods.
The tariff on aviation turbine fuel may add to the existing stress of domestic airline operators, wherein the rupee and rising oil prices have already affected their working capital.
What should be done?
Exports - A more robust approach would be measures to boost exports and simultaneously reduce the import-intensity of the economy.
Policymakers must renew efforts to ensure that export growth starts outpacing the expansion in merchandise imports.
Imports of IT and electronics goods are also rising that affects our balance of payments and hence import substitution measures must also focus on sectors, other than just oil.
Domestic supply chain - Delay in getting GST refunds affects smaller exporters, where they have been badly hit by working capital shortfalls.
Expediting the refunds on GST to them could help in the establishment of domestic labour-intensive supply chains in India.
It could also attract sectors like textiles and leather that are moving out of China to countries such as Vietnam and Bangladesh.
This could avoid levying import tariffs imposed at the rate of 25% on Imported footwear with the recent hike.
Imports - Despite the abundance of coal reserves, thermal coal is one of India’s fastest-growing imports.
This is a consequence of under-investment in modernising the entire coal production and utilisation chain and must be addressed expeditiously.
Ensuring faster permissions for mining companies as well as a more attractive fiscal regime could re-vitalise this sector.
Rate hike - It was suggested that the policy rates be raised to stabilise the rupee.
But, it will certainly hit portfolio flows and the debt flows since every rate hike results in capital losses for them.
Bonds - The idea of floating NRI bonds to shore up dollar inflows will help to strengthen the rupee.
Gold accounts for 10% of the quarter's trade deficit.
Thus, improving the gold bond scheme by making it more liquid could also reduce the imports of gold.
Global factors - Global crude oil prices are showing no signs of reversing their upward trajectory in recent times.
Also, the sanctions on Iran and the possible US pressure might force India to look for other suppliers for crude oil, making it necessary to ensure a reliable supply chain.
Given all these factors, the government will need to address structural imbalances that will prevent the CAD from widening close to or exceeding the 3% of GDP level.
