Hiking import duties won’t help India lower its current account deficit; in fact, it may hurt trade
In yet another half-hearted attempt to contain the Current Account Deficit (CAD), the Centre has announced increases on import duties for 19 items that it deemed ‘non-essential’ last week. White goods have attracted the highest tariff hikes of 10 per cent, jewellery, gold and silverware, radial car tyres, sanitaryware, luggage and Aviation Turbine Fuel (ATF) have seen hikes of 5 per cent and semi-processed diamonds, gemstones et al increases of 2.5 per cent. Though the Rupee has registered a mild pull-back since, the tariff tweaks are too little and have come too late to have a lasting impact on either the CAD or the exchange rate.
In selecting the ‘non-essential’ items on which to peg up tariffs, the Centre appears to have tried hard to accommodate various domestic interest groups. Though India splurges nearly $50 billion a year on importing electronic and telecom products, and runs up a huge trade deficit on them, consumer appliances such as air conditioners and washing machines accounting for less than $2 billion in imports have been singled out for duty hikes. Here, the Centre appears to have been wary of stoking consumer goods inflation in a pre-election year. Industrial raw materials such as crude oil, gold, coal and rough diamonds make up 45 per cent of India’s import bill, draining it of over $200 billion each year. But the latest tariff hikes target inconsequential items such as ATF, jewellery, gemstones and polished diamonds, which tot up to just $14 billion. The idea appears to be to target perceived ‘luxury’ goods, while not queering the pitch for exporters. Duty hikes on also-ran items such as footwear, luggage and sanitaryware may work more to protect small manufacturers from cheap imports than narrowing the CAD. Overall, hiking tariffs on items that make up just 4 per cent of India’s import bill is quite unlikely to support the Rupee, at a time when the CAD is being influenced by far weightier factors such as escalating trade wars, galloping oil prices and a surge in demand for products that simply aren’t made in India.
In fact, considering that the latest tariff measures are unlikely to help the CAD situation, they could have been entirely avoided, given the lack of policy coherence that they signal on the international trade front. Through a series of tariff interventions since the last Union Budget, India has effectively signalled to the world, that it is not averse to reversing its years-long trade liberalisation policy that had significantly rationalised its duty structure. This makes for bad optics at a time when India is wrangling with its global trade partners to roll back their protectionist tariffs. Ad-hoc tariff changes on manufactured and intermediate goods also actively impede efforts by domestic manufacturers to onboard the global supply chain and create avoidable uncertainty for foreign direct investors who are just stepping into India’s consumer markets. All this is considerable pain for very little gain.