Won’t dent demand much, analysts feel boosting farm exports and trimming coal imports would help.
The government’s move to raise customs duties on 19 products, including consumer goods and aviation turbine fuel (ATF), to trim the current account deficit (CAD) and ease the pressure on the rupee will have only a limited impact, as demand is unlikely to fall meaningfully due to the upcoming festival season, said analysts. As such, at Rs 86,000 crore, imports of these items accounted for only 2.5% of total merchandise imports and 0.5% of nominal GDP in 2017-18. However, the move sends a signal that the country is willing to act to curb “non-essential imports”, they said.
Even assuming that the duty hikes cause these imports to drop by Rs 10,000 crore this fiscal (which is an optimistic estimate), it will reduce the CAD (as a percentage of nominal GDP) by only 5-6 basis points in FY19, said analysts. This potential decline of Rs 10,000 crore accounts for only about 2% of the estimated CAD for FY19.
DK Joshi, chief economist at Crisil, said the government must take more measures to push exports immediately, apart from targeting imports of certain other items like coal, to trim the CAD. “Farm exports, in particular, need to be promoted aggressively. (Since China has imposed extra tariff on many American products due to the ongoing trade war)… there is a great scope for India to export more cotton, soyabean and maize to China, among others,” Joshi said. Goods and services tax (GST) refunds for exporters need to be expedited, he added.
Bank of America Merrill Lynch chief economist Indranil Sengupta has argued that a $30-35 billion issuance of NRI bonds would help stabilise the rupee. On Monday, BofAML said a foreign currency swap window for oil marketing companies (OMCs), the largest consumers of dollars, is also unlikely to help. It favoured, once again, the idea tapping into the diaspora by doing an NRI bond issue.
“We do not think it is possible for the RBI (Reserve Bank of India) to set up a forex swap window to fund oil imports by OMCs with our oil strategists seeing $95 per barrel by June 2019,” it said.
BofAML this week raised its India CAD forecast by 20 basis points to 2.8% of GDP for FY19 (against 1.9% last fiscal), anticipating oil prices to rise further. Most analysts expect the CAD to touch 2.6-2.8% this fiscal, highlighting upside risk to these estimates. If foreign portfolio flows do not revive and the US-China trade war escalates, the brokerage feels the RBI will have to sell another $10-15 billion by March itself to fund FY19 CAD forecast of 2.8% of GDP.
Some experts have called for long-term solutions to address the current account deficit instead of band-aid solutions like targeting “non-essential imports”. “The CAD issue can be addressed sustainably through only solid structural reforms, aimed at boosting manufacturing in the medium term,” said Biswajit Dhar, professor at Centre for Economic Studies and Planning of JNU.
Madan Sabnavis, chief economist at CARE Ratings, said: “The step taken by the government is positive in scope. However, the overall impact on demand for imports may be minimal and restricted to specific products.” To the extent that imports come in at a slower pace, the price effect would be there and inflation on account of imported prices will increase, Sabnavis said.
Aditi Nayar, principal economist at Icra, said duty hikes will have only “modest impact on curtailing the size of the CAD”.
The government on Wednesday raised import duties on a range of products, including gold jewellery, semi-processed diamonds, air conditioners, refrigerators, washing machines (up to 10 kg), ATF, footwear, certain car tyres and plastic products. The hike was in the range of 2.5-10 percentage points.
The widening CAD has been blamed, among other global factors such as the rise in the US interest rates, for the weak rupee, which has depreciated around 13% against dollar this year. Brent breached the $80 per barrel mark on Monday and analysts at BofAML expect it to go up further to $95 by June 2019, which will put further pressure on the current account.