Govt Hikes Import Duty on AC, Fridge, Footwear & 16 Other Items

Import duty on ACs, refrigerators and washing machines under 10-kilogram capacity has been doubled to 20% each.

India will increase the import duty on 19 items, including air conditioners and washing machines, in an attempt to curb imports that would help in bridging the widening current account deficit and reduce pressure on the rupee.

The increase in rates of basic customs duty will be effective from midnight on Wednesday, 26 September, according to a statement by the finance ministry. The total value of imports of these items in 2017-18 was about Rs 86,000 crore.

Import duty on air conditioners, refrigerators and washing machines under 10-kilogram capacity has been doubled to 20 percent each from 10 percent earlier. The basic customs duty on radial tyres is now 15 percent compared with 10 percent earlier, while the levy has been hiked to 25 percent from 10 percent on footwear. The government also introduced an import levy of 5 percent on the aviation turbine fuel.

Here’s the full list of items on which tariffs have been increased:

Changes In Import Duties

(Tariff measures taken to curb the imports of non-essential items)

A higher oil import bill along with strong growth in non-oil non-gold imports have led to a wider trade deficit for India. While export growth has picked up in recent months, it has remained below the rate of growth of imports. leading to a widening of the trade gap. The merchandise trade deficit in the April-August 2018 period stood at $80.35 billion compared to $67.27 billion in the same period last.

How Much Will it Help?

Not everyone is convinced that import curbs will help in materially reducing the current account deficit or break the fall in the Indian currency. Besides, they can prove to be inflationary.

In a note released earlier this week in response to speculation of import duty hikes, Bank of America-Merrill Lynch said that demand for items like gold does not react to small tariff changes. In the case of consumer goods too, demand may not be very price sensitive. The report added any tariffs imposed on steel may have limited impact due to free trade agreements with South Korea and Japan.

Jahangir Aziz, chief emerging market economist at JPMorgan, also felt that the current account deficit cannot only be analysed using the import-export imbalance. Aziz believes that the current account deficit should be viewed as an imbalance of savings and investments. As such, correcting it will need adjustment on at least three fronts – monetary policy, fiscal policy and exchange rate.

Breather for The Rupee?

To be sure, the import duty hikes could marginally help in soothing sentiments in the currency markets. This is the second set of measures announced by policymakers to curb the fall in the rupee, which has depreciated by nearly 12 percent so far this year.

On 14 September, the government announced measures to attract capital flows including:

• Easing of mandatory hedging conditions for infrastructure loans.
• Permitting manufacturing sector entities to avail external commercial borrowings up to $50 million with a minimum maturity of one year versus the earlier period of three years.
• Removing exposure limits of 20 percent of foreign portfolio investors’ corporate bond portfolio to a single corporate group, company and related entities.
• Exemption from withholding tax for issuance of Masala Bond issues done in FY19.
• Removal of restrictions on Indian banks’ market making in Masala Bonds, including restrictions on underwriting of such bonds.

(This piece was originally published on BloombergQuint.)