Import duties: With Uttar Pradesh elections in offing, sensible policies have to wait

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New Delhi | Updated: January 9, 2017 6:52:23 AM

Though commerce minister Nirmala Sitharaman has said the government has no plans as of now to cut import duties on sugar, it is not clear what the official strategy is.

After back-to-back droughts hit production in Maharashtra uncertainty over what this year’s output will be. (Source: IE)After back-to-back droughts hit production in Maharashtra uncertainty over what this year’s output will be. (Source: IE)

Though commerce minister Nirmala Sitharaman has said the government has no plans as of now to cut import duties on sugar, it is not clear what the official strategy is. After back-to-back droughts hit production in Maharashtra, where several mills have stopped crushing due to a shortage of cane, there is considerable uncertainty over what this year’s output will be. While the official estimate is around 22.5 million tonnes, the Indian Sugar Mills Association believes it will be in the region of 23.4 million tonnes—a clearer picture will emerge by the end of the month. Either way, a production of this level will leave India with a lower closing stock. While it is possible next year’s crop may be better, and there can be a debate on what the ideal level of stock should be, surely an import duty cut is called for as a matter of prudence if there is a likelihood of supply remaining constrained? Indeed, the government would do well to keep in mind its recent experience where, thanks to an optimistic wheat production target, it kept import duties high—when it became clear there was going to be a shortage, it cut import duties from 25% to 10% in September and was forced to reduce this to zero last month; import duties were cut for palm oil and potatoes as well.

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More important, it needs to look closely at what the right import duty level should be. Right now, for instance, if raw sugar is imported and converted into white sugar at a zero import duty, the price is likely to be around R39-40 per kg, a figure marginally higher than the current price of local sugar. Since the current 40% import duty raises the price of imports to over Rs 53-54, it appears the import duty is arbitrary, perhaps imposed at a time when global prices were much lower. In any case, with an export duty of 20% and an import duty of 40%, it is not clear if the government wants to discourage exports or imports. A large part of the problem, of course, has to do with irrational local pricing of cane—since the states set a high price, the only way for mills to make money is to ensure import duties are high. A related issue the government needs to keep in mind is that, since cane is a water-guzzler, a lower import duty is good for the country—of course, with elections in UP around the corner, sensible policies will be on hold for now.

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