Higher Customs revenue likely to help govt rein in its fiscal deficit

As an unexpected saviour, a higher-than-expected revenue from Customs duties is likely to help the government rein in its fiscal deficit within the targeted 3.3 per cent of gross domestic product in 2018-19 (FY19).

Business Standard has learnt from official sources that net Customs revenue has registered a growth of 26 per cent in the first six months of the financial year: April–September FY19. This is higher than the growth of 19 per cent the government expects in basic Customs duties.

Another set of data points in the same direction. The finance ministry’s port-level data shows that gross import tax collection (Customs and integrated goods and services tax) has grown 33 per cent in April-October period, over the previous year.

But more importantly, the second half (H2) of the financial year could amass even better revenue from Customs, senior finance ministry officials indicated. There are two reasons for this: One, the rupee has stabilised at a level higher than the average level in the first half. Two, higher Customs duty rates would apply for the entire six-month period as opposed to gradual rise in rates of different commodities in the first half (H1).

Finance Minister Arun Jaitley surprised observers of the economy when he raised Customs duties on several items in his fifth Budget. Successive hikes followed in August and October.

Intended primarily to curtail domestic demand for “non-essential items” and arrest current account deficit as oil prices were rising, India’s non-oil trade deficit contracted in April–June 2018. But soon, imports made a comeback.

Non-oil trade deficit grew 35 per cent, 19 per cent, and 60 per cent in July, August, and September, respectively. In the same period — second quarter (Q2) of FY19 — the rupee plunged from Rs 68.6 to Rs 72.6 against the dollar.

Thus, Q2 saw a growth in net imports in consonance with currency depreciation. The combined effect of these two factors resulted in an increase in the landed cost of imports.

Now, Customs duties are applied ad valorem, or as a percentage rate on the landed import cost. As import costs increased, realisation of Customs revenue, too, increased. This is visible in the government accounts maintained by the Controller General of Accounts (CGA).

In terms of basic Customs duties, the government expects Rs 963 billion in FY19 (Budget Estimate), up 19 per cent, from Rs 808 billion in 2017-18 (Revised Estimate). Adding other receipts, the government had expected a monthly realisation of Rs 90-100 billion from Customs, officials said.

Barring July, revenue from Customs has remained healthily above Rs 100 billion in FY19, the CGA data shows. At Rs 645 billion in the first half of the year, net Customs revenue collection is about Rs 50-60 billion higher than expected. Finance ministry officials confirmed this to Business Standard.

Now, higher import duties were applied successively on more and more items over H1 of FY19. Similarly, the rupee depreciated gradually over the period. The situation in H2 would be different.

Economists opine that the rupee will stabilise at the current value. In addition, higher Customs duties would stay for the entire six-month period. This would ensure a much higher growth in Customs revenue in October–March FY19.

At one end, analysts are expecting a shortfall of Rs 500-600 billion in central goods and services tax collection in FY19. They are expecting a subsequent reduction in capital expenditure too, to restrict the fiscal deficit.

Though not commensurate, it is likely that the bonus from Customs might give the government some legroom for strategic spending at the doorstep of general elections.