Home >Market >Mark-to-market >Import duty hikes: Much ado about nothing

How effective will be Wednesday’s import duty hikes on 19 supposedly non-essential items?

In a nutshell, not much.

Given that these are a small share of overall imports, the measures would help reduce imports by only about $500 million (0.1% of total imports), which is quite small, economists from Nomura said in a report on Thursday.

Will it help curb the rupee’s fall? Not really. Bank of America Merrill Lynch Global Research does not see the 2-10% increase in import tariffs on $10-15 billion of imports materially supporting the Indian rupee.

Even as the government has included consumption-related articles in their current list of import duty hikes, the fact that the share of these items is small in the overall pie means that the needle wouldn’t move much.

Reports say the current nominal import duty hikes will help the government raise revenue worth about Rs4,000 crore. That’s loose change. The only consolation for investors can be that this move is a small sentiment lifter. Perhaps it also holds out the hope that the government is going to continue to take steps to arrest the rupee’s weakness.

Importantly, gold was spared and to that extent, this should put a check on unofficial gold imports into the country. Not surprisingly, shares of Titan Co. Ltd were trading higher on Thursday.

Also, steel, which was much talked-about as an item that could be included, was left out of the purview of the current duty hikes.

The most unusual item on the list is aviation turbine fuel (ATF), the duty on which was increase to 5% from nil earlier. ATF imports are a small proportion and, as such, the impact is expected to be limited.

A few jewellery and related items have seen a tax increase but it would be foolhardy to expect a curtailment in demand, with these items not being very price-sensitive. To the extent some of these are re-exported, the impact on the current account deficit is even more limited, says BofA Merrill Lynch.

Meanwhile, the tariff hike on air conditioners, refrigerators and washing machine would have a bearing on consumer durable companies. Since most Indian consumer durable companies import a meaningful part of their raw material (around 30-50%) from countries such as China, the duty hike coupled with a depreciating rupee will have an adverse impact on their gross margins.

Foreign brokerage CLSA has said that Voltas’s joint venture with Turkey-based company Arcelik would be hurt as the appliances are 100% imported and their domestic factory will likely take a year to start. Another casualty could be Havells India since it currently imports 70% of its subsidiary Lloyds’ requirement, although the company has the option to shift to domestic manufacturing, CLSA said.

While analysts expect companies to collectively pass the burden of custom duty hike by increasing prices, a price hike could come with a lag.

On the other hand, the increase in customs duties on segments such as footwear, luggage and plastic products may have been done to give support to local manufacturing. It is worth noting that most of these 19 items are not high-value items individually and do not form a large portion of the overall imports. However, these industries are labour-intensive and IIP data indicates that manufacturing activity here has remained weak for some time now.

Further, Antique Stockbroking Ltd sees Apollo Tyres and MRF Ltd benefiting marginally from increased duty on passenger car radial tyres. “Passenger car radial tyres is ~20% of the Apollo’s India revenue. However, PCR imports in India would be just 15% and a significant chunk of that would be for premium high end luxury segment where there is no local manufacturing facility," it said in a report.

In short, the impact of the import duty hikes may not be worth the negative effect it will have on India’s image as a relatively open economy.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Edit Profile
My ReadsRedeem a Gift CardLogout