India Hikes Import Duty on ACs, Refrigerators and 16 Other Items

New Delhi: The Narendra Modi government on Wednesday raised import duty by 2.5%-10% on 19 “non-essential” items including aviation turbine fuel (ATF), air conditioners and refrigerators in an effort aimed at reining in India’s widening current account deficit (CAD).

However, economists The Wire spoke to pointed out that the move may not prove very effective in achieving the intended objectives, though it may help the government raise some additional revenue and narrow the fiscal deficit.

For example, N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy (NIPFP), wondered how the imposition of 5% import duty on ATF would help in reducing CAD given that it is an essential item for the aviation industry and its imports cannot be reduced.

Higher duties could yield extra revenue of up to Rs 5,000 crore for the Centre, said Bhanumurthy.

Economists also expressed fear that tariff hikes could end up aggravating inflationary pressures building up due to the rising oil prices.

The import duty hikes are also unlikely to have any significant impact on competitiveness of India exports. However, the domestic manufacturing may benefit from high import duties.

Higher import duties, coupled with a depreciated rupee, are likely to boost cost competitiveness of the Indian manufacturing sector.

Ajay Sahai, director general, Federation of Indian Export Organisations (FIEO) reckons that the rupee depreciation has given 10% cost advantage to domestic manufacturers and import duty hike could add to that.

Anil Bhardwaj, secretary general, Federation of Indian Micro, Small and Medium Enterprises (Fisme), said small businesses will not be affected by tariff hikes.

Jewellery, washing machines of less than 10 kg, speaker, footwear, radial car tyres, sanitary wares like bath, shower bath, wash basin, tableware, kitchenware, stationary and office items of plastic, luggage like trunks, suitcases, brief cases are the other consumer items that have attracted increased import duty hikes.

Compressors for air conditioners and refrigerators, cut and polished diamond, non industrial diamond and lab grown diamonds are products, that are basically used as raw material by the industry for assembling or manufacturing finished items, have also attracted import duty.

Increased duty will be effective from midnight tonight. India imported goods worth Rs 86,000 crore in 2017-18, as per the official release issued by the finance ministry.

The move is in line with the five-pronged strategy, including curbs on non-essential imports,  unveiled by the government recently to ease pressure on macroeconomic fundamentals. The decision to implement these measures was taken in a meeting chaired by Prime Minister Narendra Modi.

Briefing the media after the meeting, Jaitley had said non-essential items will be identified after consultations with various ministries. "To address the issue of expanding CAD, the government will take necessary steps to cut down non-essential imports and increase exports. The commodities of which imports will be cut down will be decided after consultations with concerned ministries and will be WTO-compliant," Jaitley had said.

The other measures identified by the government to rein in widening CAD included exempting  masala bonds from withholding tax.

Jaitley also said the government will review the existing policy of mandatory hedging of infrastructure loans as part of its strategy to check rupee volatility.

The rupee touched an all-time low of 72.91 against the US dollar on September 12 and it closed at 71.84. The domestic currency has declined more than 12% this year.

The rising trend in oil prices this year has sparked concerns about India’s ability to finance its widening CAD, triggering flight of foreign portfolio investment.

After a period of lull, the global oil market started rising early July on fears of supplies tightening due to re-imposition of nuclear sanctions on Iran from November 5. About 1 million barrels per day of oil supply has already been sucked out of the market as buyers cut supplies from the Persian Gulf country on fears of being hit by American sanctions.

Global investment research firms have expressed fear that oil prices could soar above $90 a barrel by the end of this year. Global financial services firm Nomura has projected that India’s CAD could rise to 2.8% of GDP in 2018-19 from 1.9% in 2017-18.

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