The government may target some “non-essential imports” through duty hikes, as part of its efforts to contain the elevated current account deficit (CAD) if the fall in the rupee against the greenback continues unabated.
The authorities have already enhanced the monitoring of imports of select products, including electronics, that have witnessed a sharp spike in recent months. Elevated CAD has proved to be a double whammy for the rupee at a time when the US Federal Reserve has resorted to aggressive policy tightening to control inflation.
However, a final decision on whether to raise import tariffs on any such product is yet to be made, official sources told FE.
“The government is keeping a close eye on the import situation. It (targetting non-essential imports) may happen if the trade deficit continues to remain at very high levels in the coming months and exerts further pressure on the rupee,” one of the sources said. He, however, conceded that the scope for such an intervention remains limited.
India’s current account balance recorded a deficit of 2.8% of the gross domestic product (GDP) in Q1FY23, up from 1.5% in Q4FY22, driven by high merchandise deficit of $68.6 billion. Though the CAD came in lower than estimated by many in Q1FY23, rating agency ICRA recently projected it to widen to a precarious 5% of the GDP in the September quarter, the second-highest level since the third quarter of FY12.
While merchandise exports barely rose in the past two months, reflecting a demand slowdown in key western markets, a sustained surge in imports drove up trade deficit. It hit a record $30 billion in July before easing a tad in August to $28 billion.
Senior industry executives, however, apprehend that import duties on select consumer electronics items, apart from jewellery made of precious metals, may be raised to curb their inflows. Electronics is the country’s largest import segment after oil. Since the import duty on raw gold has already been raised to 15% from 10.75%, there is no scope for any further increase here.
The industry sources feel targeting imports doesn’t always produce the intended result.
The rupee hit 81.79 on Thursday, having eased a tad from a record trough of 81.94 on Wednesday. It was the fourth time in six sessions that the domestic currency had hit fresh lows due to the Fed tightening. However, the rupee, still has performed better than most other currencies against the greenback. Official data showed electronics imports jumped 35.3% in FY22 to a record $71.2 billion, having made up almost 17% of the overall merchandise imports. In the first five months of this fiscal, such imports jumped 28.5% to $31.3 billion. Within this, consumer electronics imports climbed 74% on year to $3.4 billion until August this fiscal. Similarly, imports of jewellery made of precious metals like gold spiked 151% between April and August from a year before to $437 million.