Home >Budget >News >Budget hikes customs duty to push local manufacturing

New Delhi: The union budget of 2020/22 increased customs duty on over 20 items, everything from cotton and raw silk to certain categories of plastics, leather, auto parts and even screws and nuts. The tariff increases, the government hoped, will provide a level playing field not only domestic manufacturers but farmers as well.

The rate of duty varies depending on the category — the government, for instance, sees a potential in the domestic manufacturing of heavy capital equipment. The finance minister, Nirmala Sitharaman, has thereby proposed to withdraw exemptions on tunnel boring machine that would now attract a customs duty of 7.5% and its parts a duty of 2.5%.

The government has also proposed changes in customs duty to promote value addition in the electronics sector. The success of India’s mobile phone manufacturing industry, for example, is built around phone assembly. Much of the valuable components, chip included, is imported. Some of this is set to change.

“Domestic electronic manufacturing has grown rapidly. We are now exporting items like mobiles and chargers. For greater domestic value addition, we are withdrawing a few exemptions on parts of chargers and sub-parts of mobiles. Further, some parts of mobiles will move from ‘nil’ rate to a moderate 2.5%," Sitharaman said.

The implication of these announcements: There will certainly be more local manufacturing and by extension, more jobs creation at the bottom of the pyramid. More local manufacturing is also good news for the skills ecosystem.

“Lot of of auto components today are imported from china. The announcements will help in localisation," Vinnie Mehta, director general of the Automotive Component Manufacturers Association of India said. “India already has a competent auto parts industry. More localisation will now create scale," he added.

The mobile phone industry, meanwhile, is studying the latest announcements around custom hikes carefully, industry captains said. “While more localisation is good news over a period of time, the announcements have to be in sync with a phased manufacturing plan," Sunil Vachani, executive chairman of contract manufacturing company Dixon Technologies (India) Limited said. The ostensible reason for caution is that domestic skills and capabilities to manufacture a lot of the components are yet to take root and may take more time.

The context: The announcements around import substitution is hardly surprising. In fact, the Modi Government first announced a differential-duty structure around electronics manufacturing in the union budget of 2015/16. Every budget came with its own set of higher tariff proposals, leading many experts to call them protectionist. Since 2018, India has been far more projectionist than any other country at a similar per capita income level, a column in Mint by Vijay Kelkar, R.A. Mashelkar and Niranjan Rajadhyaksha stated. Such interventions, which include tariff hikes, new licensing requirements and changes in FDI rules, added up to 233 in the last two years, the authors wrote. The Indian government, on its part, wants more employment creation in the manufacturing sector to ease the migration of people from farm to non-farm jobs. Border tensions and the pandemic of 2020 have now made de-risking from China a top priority.

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