By Sunanda Natrajan
Acquiring the latest of everything has been a defining attribute of this generation. In fact, with the technological revolution and the advent of globalisation, cross-country trade has made it possible to purchase German cars and to connect to the world using latest phones, all at a cheaper rate. However, with the announcement of the 2018-19 Budget, the scenario might change to a slightly less gratifying one. Along with generous allocations for the poor, one of the prime highlights of this years budget was the announcement of an increase in the import duty of around 45 items, an attempt mainly aimed towards propelling the Prime Ministers Make in India campaign.
What does it mean for the taxpayer?
Finance Minister Arun Jaitley, in his Budget Speech, announced a hike in the customs duty levied on various items spanning across more than 10 sectors including FMCG, auto and pet-coke industry, which is expected to fetch the government a total revenue of Rs.7000 crores. Mobile phones experienced a hike in duty from 15% to 20%. According to Pankaj Mohindroo, President of the Indian Cellular Association, about 81% of the mobile phones sold in the country are locally manufactured. So this increase might not have that grave an impact. However, parts and accessories used in making phones are imported from foreign countries and will be affected by the massive increase in the duty from 7.5% to 15%. Even parts used to make mobile chargers, which were duty-free earlier, will now attract an import duty of 10%.
Besides mobile phones, there is also a 5% increase in duties levied on the automobile industry which includes both vehicles imported through Completely Knocked Down (CKD) kits mechanisma method of importing a vehicle in the form of different parts and then assembling itand for Completely Built Units (CBU). This will eventually push the entire import duty, currently at 180%, to an exorbitant amount, also considering the additional GST cess.
The import duty hikes are more severe in the agricultural sector where the duty on imported juices has been raised from 30% to a mammoth 50%, while vegetable oils will attract a tax of 35% or 30% as compared to last years rates of 20% or 12.5%. The pet-coke industry will also witness gigantic increases in cost as the duties rise from 2.5% to 10%. The 10% surcharge in customs duty is also expected to hit the power sector, chiefly because most of the items in the power and equipment industry, like aluminium conductors and wires among many others, accounting for 60% of the total cost, are purchased in bulk at a fixed price and then their price is governed by commodity pricing. Moreover, 80% of Indias solar power is dependent on imported materials and a 10% cost on the already existent 7.5% could heavily impact power rates throughout the country.
Effect on the economy
To put it into perspective, these budgetary increases in the import duty are anticipated to hit the economy in a real sense soon. Sectors like power, automobile and agriculture will witness huge increases in terms of the total costs incurred and the underlying fact is that the largest consumer of these products is the upper-middle class and middle class of the society. For the upper, high-income section of the society, a 5% increase in most items shouldnt adversely affect their consumption and future demand because high income allows for a high purchasing power. However, for the middle class, this could bear a negative impact on their standard of living. Lower income groups would be affected most in regards to the essential commodities of the agricultural sector, whose prices will now be raised, thereby affecting their daily consumption bundle and practically forcing them to control their demand or switch to cheaper substitutes.
Political economy of protectionism
It has been widely acclaimed that this declaration of increasing import and customs duties is a move to promote the Make in India campaign. Therefore, imposing high duties on mobile phone accessories and CKD cars is essentially meant to be a step towards incentivising home-grown industries to up their game and produce locally, what has been imported from China and USA since so long.
However, what will that actually happen? The first rule of domesticizing production of imported goods and attaining self-sufficiency is to levy duty on the component parts of the commodity instead of the complete product unit. Following a step-by-step approach, the home producers and manufacturers will then start by attempting to produce the various parts of goods locally and then successfully assembling them to produce the entire product. However, in order to do that, the manufacturing sector of the economy will need to be equipped with the required infrastructure and additional capabilities to build and access the kind of technology required in production. By imposing high duties directly, the cost of production will shoot up in the short run giving rise to an upward inflationary pressure. Simply put, high duties in the present scenario are unlikely to encourage domestic production because there isnt enough funding to invest in the necessary infrastructure. Subsequently, this burden will be transferred to the consumers who, in the long run, might resort to reducing their demand for these products.
Parallel to this, the cost at which this protectionism is being provided to the industry seems to be neglected. Everyone accruing the benefits of this protection does not necessarily have the incentive to pay for enjoying this protection. Along with the cost of imports, the education cess and higher secondary education cess has also been replaced with a Social Welfare Surcharge. Since the social welfare surcharge is not credible, it results in an added tax burden besides the increased customs duty rate. So the real question here is, are the people who will enjoy the advantages of this protectionism, paying for it? The industries will continue to import the parts and simply shift the burden of the duties onto the consumers.
Indigenising production is a necessary a target to achieve for the countrys economic growth, but only, when the manufacturing sector is well-equipped with the required infrastructure to carry out this technologically advanced production. Right now, this only seems like a populist move which is neither protectionist nor productive; an avowal that is trying to reaffirm the nations flagship campaign for self-reliance without any resourceful backing. Hence, the immediate after-effect of the increased duties will just see a sudden surge in the prices of normal, everyday-use items like edible oil, petrol and juices. However, if the government plans to invest in the infrastructural facilities imminent to production, then the positive spill-over effects of this proposal might visibly impact the Indian economy giving hope for a prosperous future.
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