The government is set to announce a slew of measures to contain the current account deficit and spur dollar inflows. According to sources, measures to put a lid on imports might include higher customs duties on luxury goods, including high-end smart phones, laptop batteries, tablets, luxury watches, foreign liquor brands and items such as air conditioners, fridge, LED TV and a few metals.
Finance minister P Chidambaram on Friday held a series of meetings with top officials of the finance and commerce ministries to firm up additional steps to support the rupee which has lost about 12% since May. An announcement, sources said, was expected as early as Saturday.
The steps on the capital account include relaxation of external commercial borrowing (ECB) norms, prompting cash-rich PSUs to raise money abroad through long-term bonds and ways to attract NRI funds like giving them differential interest rates.
As for the import curbs, the idea, sources said, is to reduce imports of items of final consumption especially of those seen as luxury items or those having an adverse impact on heath, environment or society such as tobacco and alcohol. With the industrial production stagnating in the first two months of this fiscal, the government clearly does not want to make any imports by manufacturing sector more expensive by hiking taxes. Among the items that are targeted for import compression are high end watches with precious metals or precious or semi-precous stones that currently attract only 10% import duty, tobacco products on which 30% customs duty is levied, beer that attracts 100% import duty and various wines and spirits including scotch on which 150% customs duty is applicable now.
While taking a final call, the government would likely ensure these are flexible short term measures. A hike in import duties on automobiles is not on the agenda.
Also on agriculture products, there is already very high import duty under WTO to give protection to domestic farmers. The government is looking at items where WTO-specified bound tariffs are much above the currently applicable ones, giving scope for increase in rates.
The finance ministry is also considering asking public sector companies such as ONGC, IOC, GAIL, HPCL, BPCL and SAIL to raise money abroad through long-term bonds backed by sovereign guarantee to the bond issuer. Financing companies like IIFCL, REC, IRFC and few PSU banks may also be urged to tap overseas markets. Several meeting have been held with the heads of several PSUs to finalise these measures.
In order to attract more FII funds, the ministry might also raise FII limit in government debt and corporate sector soon. Presently, FII limit in government debt is $25 billion and in corporate sector, is $51 billion. Currently, the overall ECB limit stand at $40 billion, out of which $32 billion has been used till June end 2013.