The illogicality of raising import duties

Last Wednesday, the Union finance ministry announced higher import duties on a host of goods. The objectives of the decision were to “curb imports of certain items” and narrow the current account deficit (CAD). The ministry also noted that the value of imports of goods, whose duties were raised, was only about $13 billion or 2.8 per cent of India’s total imports in 2017-18.

An analysis of the ministry’s statement shows that the range of the increase in the basic customs duty on 19 broad categories of goods was quite steep - by about 25 per cent on footwears, by 33 per cent on three items (jewellery and compressors for air conditioners and refrigerators) by 50 per cent on as many as 11 categories of goods (including radial car tyres, diamonds, gemstones, travel bags and plastic items used in kitchens, bathrooms and office stationery) and by 100 per cent on three items (including components for air conditioners, refrigerators and washing machines). The 19th item in the finance ministry’s list was aviation turbine fuel, on which a 5 per cent customs duty was imposed. According to one estimate, the increase in duty could get the exchequer additional annual customs revenue of Rs40 billion, which is just 3.5 per cent of what the government hopes to collect by way of total customs duty during the current year.

The jury is still out on whether the increase in the basic customs duty on these items will help curb imports or reduce the CAD. What, however, can be assessed at this stage is whether the trend in the growth of imports of these items in the last few months called for such action. Did imports of these items rise at an alarming rate in 2017-18 over the previous year and have they continued to grow at the same pace in the first four months of 2018-19, for which data is publicly available? A quick look at some of these items will be instructive.

Footwears: There are five items in this category, whose duty has been raised from 20 per cent to 25 per cent. Their total imports in 2017-18 were estimated at $610 million, representing a rise of 34 per cent over 2016-17. But imports in April-July 2018 have grown by only 10 per cent at $200 million. This decline in the growth rate could be due to the sharp rupee depreciation in this period, making imports costlier, and also the steep hike in imports duty on these very items in the 2018 Budget from 10 per cent to 20 per cent. If these measures were working, why did this sector need another round of import duty increase?

Radial car tyres: Last year, their imports at $203 million grew by 24 per cent. But in the first four months of 2018-19, they have seen contraction — a decline of about 1 per cent to $64.7 million. What could be the reason for raising their duty from 10 per cent to 15 per cent? Was there competitive lobbying by domestic manufacturers after they saw how the government in its February 2018 Budget had also raised the basic customs duty on truck and bus radial tyres from 10 per cent to 15 per cent?

Articles of jewellery made from gold, silver and precious metals: Their imports in 2017-18 went through the roof to about $3,148 million, up from $373 million in 2016-17. But in April-July 2018, their imports have more than halved to $212 million from $558 million in the same period of 2017. Clearly, that slowdown did not satisfy the government and it hiked the import duty on them from 15 per cent to 20 per cent.

Similarly, components for household refrigerators, plastic items for office stationery, bathrooms and kitchens, travel bags, diamonds and gemstones have either seen a decline in their imports in the April-July 2018 period or a deceleration in the import growth rates. There are a very few categories like speakers, components for air conditioners and washing machines and aviation turbine fuel that have seen higher growth in imports in the first four months of 2018-19 than what was seen in the whole of 2017-18.

The question is: If the data for the last several months showed a deceleration or decline in imports of several of the items, whose customs duty was raised, what factors could have influenced the government in arriving at this decision? Did the government take into account the deleterious impact such duty increases have on the efficiency of domestic manufacturing? Was using discretion to pick and choose a few items and levy a higher duty on them, therefore, a sensible policy, particularly when rupee depreciation had already begun to rein in the import growth of many of them? As India’s experience with discretionary increases in duties has shown, selective intervention to raise duties on a few items is easy, but dismantling that discretionary regime can be a long haul.

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