Budget decision on customs duty hike to impact imports of $85 billion in a year

The duty hike on 40 categories of goods, which make up about a fourth of total imports, will augment customs collections in 2018-19 only by 19%, lower than the current year’s 25%

How large is the coverage of Finance Minister Arun Jaitley’s Budget decision to raise customs duty on the import of a variety of items? And what will be the decision’s impact on the government’s customs duty collection during 2018-19?

A quick analysis of government data shows that the coverage of the customs duty changes is relatively large, but the customs duty collection figures in the Budget may be an underestimation.

As many as 40 categories of products saw their basic customs duty being raised with effect from February 2, 2018. According to the Budget speech of February 1, these duty changes were made to provide adequate protection to domestic industry, encourage domestic value addition by promoting ‘Make in India’ and help create more jobs in the country. The increase in the duty incidence ranged between 33 per cent and 100 per cent for most of the items (see chart 1).

What is more, almost a fourth of India’s total imports could be impacted by the higher customs duty levied by Jaitley on these imports. The value of imported items on which the basic customs duty has increased was estimated at $75 billion in the AprilNovember period of 2017-18. This was about 25 per cent of total imports of $297 billion during the first eight months of 2017-18, for which the latest commodity-wise foreign trade data are available.

In 2016-17, these 40 categories of goods saw imports of $85 billion, which was 22 per cent of the total imports of $384 billion that year. A year prior to that, imports of the same items were valued at $88 billion, accounting for a share of 23 per cent of the total imports of $381 billion during 2015-16.

At an aggregate level, there was a noticeable surge in imports of these 40 categories of goods in the April-November period of 2017-18. If imports in the current year were to take place at the same pace as was witnessed in 2016-17, the value of imports of these 40 items should have reached a level of only $56 billion in the first eight months of the current financial year. However, as the data show, these imports in the same period have already reached $75 billion, indicating a 34 per cent surge.

Diamonds and gemstones, excluding rough diamonds, accounted for the largest chunk of imports that were affected by higher customs duty announced in the Budget. Imports of such diamonds and gemstones in April-November 2017 were estimated at $50 billion (almost 17 per cent of total imports), compared with $54 billion imports in the whole of 2016-17 and $56 billion in 2015-16. The basic customs duty on these items has been doubled from 2.5 per cent to 5 per cent.

Experts point out that imports of diamonds and gemstones are linked to exports, since a large chunk of such imports is used for exports after value addition. But that linkage has been adversely affected in the last couple of years. Exports of diamonds and gemstones were valued at only $28 billion in the AprilNovember period of 2017-18, $44 billion in 2016-17, and $39 billion in 2015-16. Imports rose much faster than exports in 2017-18 than in the previous two years.

Cellular mobile phones and their specified parts and accessories have seen their customs duty going up from 15 per cent to 20 per cent, and from 7.5-10 per cent to 15 per cent, respectively.

The combined value of their imports has also seen a surge at $12 billion in AprilNovember 2017. Compare this with imports of about $16 billion each in 2015-16 and 2016-17; a 12 per cent surge in their imports in the current financial year is noticeable, which could well have triggered the Budget action to raise customs duty.

Smart watches and wearable devices, including perhaps the hugely popular smart watches produced by Apple, have seen their customs duty being raised from 10 per cent to 20 per cent. Their imports in 2015-16, estimated at $2.3 billion, moved up marginally to $2.38 billion in 2016-17. But in the first eight months of the current financial year, these were estimated at $2.44 billion, recording a smart increase.

Accessories of motor vehicles, motor cars and motor cycles have also seen the customs duty on them going up from 7.5-10 per cent to 15 per cent. Their imports in 2016-17 declined to $6 billion from $6.49 billion in 2015-16. But the pace picked up somewhat in the AprilNovember period of 2017-18, when their imports were estimated at $4.95 billion.

Edible oils of vegetable origin are the other category of goods with significant imports that has seen customs duty being raised in the Budget from 12.5-20 per cent to 30-35 per cent. Their imports have been steadily rising from $1.5 billion in 2015-16 to $1.6 billion in 2016-17. Keeping that pace of increase, their imports in the first eight months of 2017-18 were estimated at $1.3 billion.

With the exception of diamonds and gemstones, almost all the remaining items on the list of the 40 selected for higher basic customs duty levy are largely used for domestic sales and consumption. Diamonds and gemstones contribute significantly to exports.

But if you exclude them from the total value of these imports, the coverage of these enhanced customs duties decreases substantially. In 2015-16, imports of such items, excluding diamonds and gemstones, were estimated at $31.58 billion in 2015-16, $31.13 billion in 20161-7 and $24.63 billion in the April-November period of 2017-18. Their share of total imports also came down to about 8 per cent for all these periods.

The government’s basic customs duty collections in 2017-18 were estimated at ~807.5 billion, a rise of 25 per cent over ~645.83 billion in 2016-17. However, the government has projected that its basic customs duty collections in 2017-18 will go up by only 19 per cent to ~963 billion. This is in spite of the customs duty increase on the 40 categories of goods.

There are serious doubts on whether the increased customs duties on these items would be able to achieve the goals of encouraging domestic value addition by promoting ‘Make in India’ and helping creation of more jobs in the country. Indeed, these could instead encourage inefficiencies in domestic production and prevent competition, as many experts have pointed out.

There is, however, some clarity on the impact of the duty hike on the government’s revenues. Thanks to these duty increases, the total customs duty collection may see a bigger rise than the 19 per cent rise projected in the Budget.