Govt mulls duty hike for car parts, hi-tech imports to bridge CAD

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Components for mobile phones, finished high-end electronic products, and high-value automobile imports have been suggested by the commerce ministry for which the government can increase import duties to bridge the current account deficit (CAD).

At the same time, the ministry has warned that it is not in favour of knee-jerk reactions, senior officials said, arguing that more time was required for analysing the long-term impacts of tariff hikes. Officials also pointed towards reports claiming the finance ministry is in favour of raising import duties on gold, and said the government has to be careful to ensure gold sourcing does not again dive into the black market. 

On the other hand, the ministry has suggested keeping heavy engineering goods and machinery out of the proposed list of items, warning of negative impacts on the downstream export sector.

Senior government sources on Friday hinted that a potential list of items will only be decided upon next week. Almost 10 months after the mid-term trade policy was updated to prioritise the reduction of the country's ballooning trade deficit and improve exports, the government has swung into action as the rupee has fallen against the dollar and high global crude prices have made petrol and diesel costlier across the country.

"The electronics segment has consistently seen policy intervention with regards to reducing our import dependency," a senior official said. India imported $21-billion worth of electronics in 2017-18, led mostly by mobile phones.

An official panel under the Cabinet secretary is already aiming to reduce the dependence on imported televisions, refrigerators, and washing machines by placing more import duties on the sector, a top commerce department official said. The import bill for these particular items amounted to nearly $2 billion in 2017-18, he added.

The action may trigger a series of protests from manufacturers and marketer of televisions, air conditioners, and smartphones, who claim to be already reeling from the mounting pressure of heightened customs duty and tax rates.

Industry representatives are proactively planning to meet finance ministry officials in the next few days to present their case. "The import duty on finished TVs has been raised to 15 per cent from nil in December last year and for microwaves it is now 20 per cent from 10 per cent earlier," said an official at a global electronics and appliances major.

Customs duties on 43 broad categories of goods, including electronics, were raised in this year's Budget. The ballooning of the trade deficit is mostly underlined by a rebound in oil global crude oil prices over the past few months. A surge in inbound capital goods such as chemicals, ores, and machinery inputs together with consumer durables, particularly smartphones and luxury items, have complicated matters further.

"While the merchandise trade deficit eased somewhat in sequential months, it stood at an uncomfortably high $35 billion in July-August, 2018, which suggests that the CAD is likely to cross 3 per cent of gross domestic product (GDP) in Q2 of FY19," Aditi Nayar, principal economist, Icra said. Unless commodity prices drop significantly, Icra expects the CAD to touch as high as $77 billion (2.8 per cent of GDP) in FY19 from $48.7 billion (1.9 per cent of GDP) in the year before.

The CAD had risen to 2.4 per cent of the country's GDP in the first quarter of FY2019 from 1.9 per cent in the fourth quarter of FY18. 

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