Flipping the protectionist coin

The customs duty rejig is a balancing act between fiscal deficit & fiscal prudence

Budget 2018 elicited a range of reactions from all corners. While many were sceptical about the announcements, more sanguine individuals hoped for crucial amendments in the IGST law. Contrary to expectations, the changes on indirect tax front were paltry and revolved around the realm of customs. Rate rationalisation on the customs front led to mixed reactions. While the Davos summit witnessed India taking a pro-globalisation approach in favour of economic growth, the protectionist stance taken by finance minister Arun Jaitley in the Budget seemed to go in a different direction. Though many feel a blanket increase in rates across a range of products will encourage domestic manufacturing, the real picture may require deep deliberation. Each category of goods must be looked at independently to assess the impact after duly factoring in all commercial considerations for the industry. Attempting to pigeonhole all the changes through the linear perspective of “Make in India” may be counterproductive. We can try to analyse the  effects of rate change across few sectors. 

A rate increase on luxury/lifestyle goods such as perfumes, silk fabrics, precious stones, imitation jewellery and products related to beauty treatment would barely raise an eyebrow. An increase in customs duty on this front will not only boost the domestic manufacturing of such goods but would also provide an additional source of revenue to the government. Similarly, in a bid to give an impetus to the domestic food processing industry and agricultural suppliers to these industries, the government has increased customs duty on raw materials such as crude and refined edible oils, fruit juices and soya preparations. Domestic players will get a competitive edge to increase their market share. The pragmatic move, within the framework of the WTO regulations, will be successful only when the grey market is regulated for these products.

Even in the case of mobile phone manufacturing, the government seems to be following a plan — starting with the import of completely built-up units to the import of semi-knocked down units to imposing basic customs duty on populated printed circuit boards, pushing companies to mount PCBs in India.

On the contrary, though an increase in customs duty on automobile parts and LCD/LED/OLED manufacturing seems to be a good move for the domestic sector, one should refrain from a knee-jerk reaction. While the Indian auto and television manufacturing sectors are robust, domestic companies may not have the necessary wherewithal to manufacture them. Besides, exploring the manufacturing option might not be economically viable for a foreign investor considering the scale of operations. One fears that the precipitous overnight increase of rates will merely inflate prices of such goods owing to prohibitive cost of imported materials. It is hoped that importing completely built-up units will not become the preferred option for Indian as well as foreign companies, leading to job losses locally. 

The government could, however, provide long-term and very competitive export incentives compared to other countries to companies that will provide economies of scale and make it viable for them to set up expensive manufacturing facilities for components such as LCD/LED/OLED panels or auto parts.

The customs duties on refractory goods increased and it is imperative to weigh the overall impact of this change. A sizable portion of refractories produced in India is consumed by the domestic iron and steel companies. A spur in construction and infrastructure projects and increased requirements for iron and steel is expected to increase demand of inputs for manufacture of refractories. However, the billion-dollar question remains whether the domestic industry can step up to fulfill the demand for such goods at an adequate pace to substitute imports. A host of economic factors merit an exhaustive impact study before crystallising the rates. Perhaps, a consultative approach in decision making (involving both domestic and foreign companies) can help. 

It remains to be seen whether these tariff amendments have a certain degree of permanence or whether they are introduced to achieve short-term goals. Nevertheless, domestic industry should gear up rapidly to take full advantage of the reduced tariff by scaling up production and channelising focus in not only beating foreign competition in India but also manufacturing cost-competitive products for the international market. Further, if the government has a subsequent tariff reduction plan on these items then such a plan should be promulgated in advance so that the domestic industry can set the right expectations and prepare accordingly.

Keeping in mind the dipping GST collections, the rejig in the custom duty structure can be seen as a fine balancing act between fiscal deficit and fiscal prudence and as an overarching design to boost revenues. The government understands that the “Make in India”campaign can truly succeed only when a conscious effort is made to customise the policy decisions after duly considering all concerns. The recently concluded industry summits to woo investors is a step in the right direction. As a corollary, guaranteeing structural changes to improve the ease of doing business and providing better infrastructure remains the key offerings of the government and major investment decisions will continue to be based on such factors.

The author is partner, Khaitan & Co. He was supported by Pratyushprava Saha, senior associate. Views are strictly personal.