Union Budget 2021: Changes to the custom duty do send out important signals for investors
There is a stated emphasis on improving exports (or cutting-edge technology), but the actual policy appears to focus on import substitution.
By Harsha Vardhana Singh
In this difficult period, the Union Budget FY22 has taken note of and proposed several steps to address a wide variety of concerns faced by Indians. To achieve a number of social and economic objectives, it has introduced changes that aim at easing operational conditions for citizens and firms.
However, it has also introduced certain policy measures which will raise costs and increase operational inefficiency in certain sectors.
Important parts of its industrial policy approach focuses on combining investment facilitation, financial support initiatives such as the production linked incentive schemes, and a combination of an increase in basic customs duty with a reduction for certain inputs. The approach appears to pull in different directions which may create obstacles to achieve some of the major milestones emphasised in the Budget.
The Budget notes that: “For a $5 trillion economy, our manufacturing sector has to grow in double digits on a sustained basis. Our manufacturing companies need to become an integral part of global supply chains, possess core competence and cutting-edge technology.”
There is a stated emphasis on improving exports (or cutting-edge technology), but the actual policy appears to focus on import substitution. Becoming an integral part of global supply chains requires a focused approach, including encouraging and facilitating FDI, timely response (import facilitation and export facilitation, transparency, stability and predictability of policy). The budget documents also lay a significant emphasis on increasing competitiveness.
While competitiveness is mentioned in the Union Budget in the context of agriculture and textiles, it does not seem to treat this as its core factor in a consistent manner.
In the context of customs duties it notes that: “Our Custom Duty Policy should have the twin objective of promoting domestic manufacturing and helping India get onto global value chain and export better. The thrust now has to be on easy access to raw materials and exports of value added products” (emphasis added).
While the basic customs duty changes are not as extensive as earlier reported, these changes to the custom duty do send out important signals to investors. India is increasingly being viewed as a country with protectionist policies.
A rise in tariffs of 2.5% results in nuisance tariffs (the burden of the tariff is more than the benefit) and creates a perception that this is the beginning of further tariff increases over time. The increase in customs duty on inputs raises the costs of inputs and reduces the ability to link up with global value chains.At a time when production linked incentive schemes have just begun, it is important that India provides a stable and predictable policy environment as the initial investment in the hub-and-spoke start getting established.
Any basic custom duty increases for promoting domestic production could be considered at a second stage because the initial global investment, including that of input-supplying supporting industries, would increase domestic content and provide the inputs of requisite quality required to link up with global value chains.
Competitiveness needs to be consistently kept as a major priority in the policies announced by the Union Budget, to get the relevant, achievable trade-offs among the different objectives that it emphasises.
The author is Chairman, Ikdhvaj Advisers