Intervening to support a falling rupee, the government on Wednesday increased the import taxes (basic customs duty) on 19 items ranging from white goods, gold jewellery and aviation turbine fuel to footwear and certain plastic items by 2.5 to 10 percentage points.
Intervening to support a falling rupee, the government on Wednesday increased the import taxes (basic customs duty) on 19 items ranging from white goods, gold jewellery and aviation turbine fuel to footwear and certain plastic items by 2.5 to 10 percentage points. The move covering goods whose aggregate imports last fiscal were `86,000 crore could jack up the prices of these goods in the domestic market and make air travel costlier.
While many of these items like air conditioners and refrigerators saw a reduction in the goods and service tax (GST) rates recently, domestic manufactures could now use reduced competition from imports to hike prices, analysts said.
While the stated objective the duty hikes is to rein in the import bill and thereby the current account deficit (CAD) — the government had earlier announced its intent to curb non-essential imports — it would also result in additional tax revenue of about Rs 4,000 crore in the rest of this fiscal.
Duty cuts, however, excluded electronic items, the surging imports of which are a major reason for India’s widening trade deficit.
FE was the first to report on September 11 about the government’s plan to target “non-essential imports”.
While the government has refrained from raising the import duty on raw gold from the current 10%, possibly on fears of encouraging smuggling, it has hiked the duty on gold jewellery from 15% to 20%. This will promote domestic value addition. Similarly, the import duty on non-industrial and semi-processed diamonds and cut and polished coloured gemstone has been raised from 5% to 7.5%.
“Air travellers will have to pay more because airlines can’t absorb a 5% import duty on ATF in the current scenario,” Mark Martin, founder and CEO of Dubai-based aviation consultancy Martin Consulting, said. Only 4% of India’s domestic ATF consumption is imported; domestic oil marketing companies will pass on the additional cost of import tax to the airlines. The domestic use of ATF stood at 7.6 million tonnes in FY18.
The other items whose imports will be costlier include speakers, radial car tyres, kitchen and tableware, semi-processed diamond and suitcases. The import duty was doubled to 20% on ACs, refrigerators and washing machines (less than 10 kg). The changes will be effective from the midnight of September 26-27.
Electronics imports went up by 12.2% between April and July to $18.46 billion, while exports of these items stood at only $2.34 billion, leaving a trade imbalance of $16.12 billion in this segment. Overall, merchandise trade deficit, a key driver of the CAD, touched a 62-month high of $18 billion in July. Between April and July, the trade deficit touched as much as $63 billion.
The rupee settled at 72.60 against the dollar on Wednesday, down 0.12% during the day. It has lost around 12% in 2018 and has emerged as Asia’s worst-performing currency.
Some analysts have forecast India’s CAD to worsen to 2.5% of GDP or more this fiscal, against 1.9% a year before, thanks to elevated global oil prices that have inflated the country’s import bill. Already, CAD touched 2.4% of GDP in the June quarter. A high CAD is bound to exert further pressure on the rupee at a time when the domestic currency has been flirting with all-time lows against the dollar day after day.
The threat to the rupee comes from a range of factors. Rising US interest rates have already driven out significant foreign money from the bond markets. Worsening relations between the US and Turkey, the American sanctions on Iran, elevated oil prices and the trade war between the US and China have discouraged capital inflows into emerging economies like India and weighing on their currencies. Uncertainties surrounding the 2019 elections add to the problems.