Import duty misstep

Higher tariffs on components hurt manufacturing

The government is reportedly considering a further increase in duties on crucial components used in the manufacturing of electronics. In particular, the Union ministry of commerce is believed to be examining a possible increase in the import tariff imposed on compressors — which are an integral part of the cooling mechanism in such white goods as air-conditioners (ACs) and refrigerators — as well as on the pre-coated steel sheets and copper tubes that are also used in the manufacturing process of these items. This follows a previous increase in the duty on compressors last year, from 7.5 per cent to 10 per cent. Even though the central idea is to boost domestic manufacturing, what is more likely to happen is that domestic consumers will suffer the impact of costlier imports. Merely raising import duties hardly ever improves the overall outcomes either for consumers or producers. Previous changes in the tax environment have been passed on to consumers in this sector — first from the Goods and Services Tax (GST), and then from the tariff increase on all ACs, was­hi­ng machines and refrigerators. That last increase doubled the tariff rate to 20 per cent. 

The commerce ministry is said to be concerned about the growing current account deficit, which was dangerously close to 3 per cent of the gross domestic product (GDP) in the quarter between July and September 2018. A tariff hike that raises the price of imported goods would, of course, depress demand for those items and thus exert downward pressure on the current account deficit. However, this is a short-sighted way of going about it. For one, it will have dangerous long-term implications. Raising the tariff on components does little other than pressuring large companies to move manufacturing offshore. This was the consequence, for example, of an increase in duty on flat panel LCD screens — manufacturing was moved out to Vietnam. 

The only safe way to deal with a current account deficit that is structurally high is to increase exports in a sustainable manner. How is that to be achieved? Essentially by creating a globally integrated, competitive manufacturing sector within India. But for that to happen, the government cannot raise tariffs on a whim. Manufacturers need a sense of security about their costs, or they will choose to locate their plants in places where there is more predictability about the availability and cost of components. Tariffs that are high, especially on intermediate goods and components, do little but disincentivise the incorporation of India into the tightly-knit global supply chains that are central to how manufacturing, especially in the electronics and appliances sector, works today. A more robust approach would be to institute wide-ranging measures to boost exports and simultaneously reduce the import-intensity of the economy. 

What is unfortunate is that the industry has also not been speaking with clarity about this issue. It is frequently willing to welcome duty hikes on final products that, in effect, consist of protection for domestic markets and producers. But a protectionist policy cannot be controlled for the benefit of one sector or another. It is important, therefore, to ensure that tariffs stay low across the board and that there are enough voices from the corporate sector making that point. The government must meanwhile realise it cannot continue on a path that will certainly harm manufacturing and exports in the long run.