Higher customs duty: Overall imports decline, but many items buck the trend

The government's justification for raising the import tariffs from February 2 was to provide protection to the local industry among others

On February 1, 2018, the Union Budget announced a significant increase in the basic customs duty on over 43 broad categories of goods, whose total imports during the immediately preceding year of 2016-17 were estimated at over $86 billion or about 22 per cent of India's total imports that year.

The government's justification for raising the import tariffs from February 2 was to provide protection to the local industry, encourage domestic value addition, boost the 'Make In India' programme and rationalise duties. The consequent increase in the duty burden ranged from one-third to double the prevailing rates. 

It is not yet clear if indeed the protectionist move, reversing a decades-long trend of steady lowering of import duties, has helped greater indigenisation, domestic value addition or the manufacturing sector as part of the Make In India initiative. 

What, however, has now been established is that the steep increases in customs duty have impacted imports of these items in the three months after the higher tariffs were notified by the Central Board of Indirect Taxes and Customs (CBIC). The nature of the impact, though, has been strikingly different for some categories of goods.

In the aggregate, imports of these 43 items slowed marginally in the last two months of 2017-18, when the customs duty on them was increased. Till January 2018, their imports were valued at $95.65 billion. If this pace had continued in February and March as well, the total imports would have reached a level of about $115 billion for the full year of 2017-18. However, the actual imports of these items in whole of 2017-18 were estimated lower at $113.76 billion.

In April 2018, imports of these items slowed further. Against average monthly imports of $9.56 billion in the ten-month period of April 2017 to January 2018, the figure for April was much less at $8.63 billion. And the average monthly import figure for the 43 items during the three months from February to April 2018 was $8.9 billion, confirming how the imports growth rate slowed more in April. 

 

A slightly different story emerges if the import figures are subjected to a commodity-wise analysis. Commodity-wise import data is now available only till April 2018. It may be too early to arrive at a final conclusion based on data for imports of items only during three months after the customs duty increase. But they are pointers that policy makers cannot ignore. 

Average monthly imports of as many as 21 categories of goods in the February-April 2018 period, when the higher duties were effective, have seen a decline of 5 to 55 per cent over the average monthly imports in the first ten months of 2017-18. The imports of three items declined marginally by less than 3 per cent. For three more items, the imports growth was flat.

But for the 16 remaining items, the average monthly imports in the February-April 2018 period shot up by 2 to 70 per cent, compared to the average monthly imports in the April-January period of 2017-18.  This increase took place in spite of the increase in customs duty on these items.

The 21 items, whose imports fell significantly, accounted for as much as $96 billion in 2017-18, or about 85 per cent of total imports of all the 43 items. These included cellular mobile phones, their accessories, LCD and LED television sets, imitation jewellery, cut and polished gems and diamond, tyres of trucks and buses, footwear, parts of footwear, wrist watches, clocks, furniture parts, lamps, entertainment articles, candles, kites, cigarette lighters, deodorants, shaving preparations, silk fabrics and cranberry juice. Does this mean a boost to domestic manufacturing or value addition in all these sectors? If the trend persists, it may well point towards that direction. 

There are only three significant items in the list of goods, whose customs duty went up, but whose imports declined by less than 3 per cent. These items include mattresses, preform of silica for use in telecom optical fibres and parts and accessories of motor vehicles, motor cars and motor cycles.  Imports of these items were valued at about $9 billion in 2017-18, of which the accessories of motor vehicles accounted for the largest share at $7.8 billion. Imports of automotive parts appear to have been impacted, but its rise has been checked very marginally. 

The 16 items, whose imports rose in spite of higher import duty, deserve to be studied closely by the government. These goods, accounting for about $8 billion of imports in 2017-18, included mobile phone chargers and adaptors, smart watches/wearable devices, CKD imports of motor vehicles, seats, tricycles for games, video game consoles, fishing rods, swings, sunglasses, perfumes, toilet water, beauty or make-up preparations, orange fruit juice and edible oils of vegetable origin. Most of these items are of consumer use and are in great demand from urban middle classes. It seems even after the higher duties, their imports have risen as their consumer demand has not been impacted by higher costs. For instance, imports of smart watches and wearable devices (which will include Apple watches) spurted to over $4 billion in 2017-18, compared to $2.39 billion in 2016-17. Average monthly imports of such items went up by 55 per cent in the three months after the customs duty hike, compared to the average monthly imports in the first ten months of 2017-18.

A decline in imports of some commodities and a rise in imports of a few others are significant also because in addition to the duty increase, the Indian rupee depreciated by about seven per cent in this period of three months. If the double whammy of a costlier dollar and higher duties led to a decline in imports of some commodities, the same factors failed to check the rise in imports of a different set of commodities.

It appears that the government's move to raise import duty was triggered by the trend in imports of these 43 items in 2017-18. This was in contrast to what happened in 2016-17, when these imports actually fell by a little over 3 per cent to $86 billion. In the first ten months of 2017-18 alone, the value of such imports had crossed $95 billion, which presumably prompted the government to raise duties on them.