Import duty hikes won’t work – Here is why

By: | Published: September 28, 2018 3:31 AM

Lower mineral imports by friendly policies, fix gold-bond scheme.

import, export, ecoomyIf imports come down by ##IMG-CONTENT##.5-1 billion, the CAD will reduce by less than 1.5%.

At a time when the current account deficit (CAD) is expected to hit 3% of GDP, you would have expected the government to do a lot more to improve India’s external finances. A combination of a $30-40 billion NRI bond, along with measures to boost exports, for instance, would have been a good idea. Similarly, there should have been an attempt to make a structural compression of India’s commodity imports—even without oil, these were around 30% of FY18 imports, and 53% with oil—by ensuring faster permissions for mining companies as well as a more attractive fiscal regime. Improving the gold bond scheme by making it more liquid was an equally obvious plan given the $8.4 billion Q1FY19 imports of gold accounted for 18% of the quarter’s trade deficit. Instead, the government raised the basic custom duty by 2.5-10% on a range of what are, essentially, consumption goods and aviation fuel.

Given the value of these imports was Rs 80,000 crore in FY18, it is hard to see the hike in levies making any serious impact. If imports come down by $0.5-1 billion, the CAD will reduce by less than 1.5%. The reason imports aren’t expected to fall meaningfully is because consumption spends remain fairly robust and it is unlikely a slight rise in prices of white goods would lower demand meaningfully. Also, the 2.5-5% hike in the duties on precious stones and jewellery should not deter consumers ahead of the festive and wedding seasons. Understandably, the government has not raised duties on gold because the move tends to increase smuggling. Indeed, the continued weakness in the rupee might play a bigger role in curbing imports; should prices of crude oil hit $90 per barrel, for instance, the quantum of oil imports might come down.

While some have suggested policy rates be raised to stabilise the rupee, this could backfire. It will certainly hit portfolio flows, but may also hit debt flows since every rate hike results in capital losses. Interestingly, the suggestion that India raise $30 billion of NRI bonds was made when the rupee was still valued at 68 or 69 to the dollar.

In order to focus on exports, the government needs to clear all hurdles, especially infrastructure and related bottlenecks, which are the single-biggest reason for flagging exports. Also, exporters were badly hurt by the delay in GST refunds and while the government may claim these have been sorted out, the situation on the ground isn’t good. The Make-in-India programme, aimed at boosting domestic production, has hardly taken off, as evidenced by imports of electronics now averaging nearly $5 billion a month. More import curbs through tariff hikes maybe on the cards, but apart from raising costs of production, they will serve little purpose. Curbing imports, and boosting exports, can only take place when the country’s investment environment is more hospitable.

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