Budget 2018: Imports will not decline with Customs duty hike, say experts

The government on Thursday raised the basic Customs duty on a range of products from consumer goods and automotive parts to fully and partly built vehicles and medical devices, among others. The hike was to the tune of 5-10 per cent with an additional surcharge slapped on the basic Customs duty, making goods costlier as a result.

But, while the move was aimed at providing a boost to the government’s Make in India plans, the question is: Will these measures actually aid local manufacturing? Experts believe that they will not, because the crucial component market required to aid local manufacturing remains weak.

“Increasing import duty alone does not help much as far as local manufacturing goes. For the latter to happen, there are changes required in industrial policy,” said Suresh Nandlal Rohira, partner, Grant Thornton India. “And that has not been spelt out in the Budget,” he added.

To get a sense of what really constitutes “manufacturing” in India, consider this: According to estimates by Counterpoint Research, over 80 per cent of handsets were imported into India in 2014, the share of which came down to 26 per cent in 2017 and is expected to slide by a further 10 per cent in 2018. But this increase in local production of handsets is nothing but “assembling” of phones, experts say. Manufacturing in the true sense does not really happen here, they add. 

“Directionally, the government seems to be a lot more inclined towards Make in India. There is a focus on value-added manufacturing. But yes, more needs to be done,” said Sanjay Nayak, chief executive officer, Tejas Networks. 

“While the increase in Customs duty on handsets will compel brands to assemble more in India, there is no great support for the local ecosystem to manufacture spare parts. And this lack of local spare-part manufacturers will mean a tough situation for mobile handset brands. Hence, a handset company is compelled to import most of the spare parts, and customers will, therefore, have to bear the cost when Customs duty is hiked,” said Syed Tajuddin, chief executive officer, Coolpad India.

According to estimates, prices will rise at least 5-6 per cent in the durables and electronics categories, including television sets, air conditioners, washing machines, refrigerators as well as mobile phones.
 

The automotive industry, on the other hand, has a mixed reaction to the Customs duty hike announced by the government on Thursday. While component makers, including tyre manufacturers, are a happy lot, foreign automobile companies, whose volumes are low and depend on imports (such as BMW and Mercedes) are unhappy. A price hike in these categories of cars was imminent, experts tracking the market said. Commercial vehicle makers, however, will see no impact of Customs duty hike.

Vinnie Mehta, director-general, Automotive Component Manufacturers Association of India, said the Customs duty hike would trigger more investments by companies in the country. “India is a net importer of auto components — $13 billion of imports vis-a-vis $11 billion of exports. The move will also help during the transition to BS-VI fuel norms from BS-IV,” he said.

Satish Sharma, chairman, Automotive Tyre Manufacturers Association, and president, Asia Pacific, Middle East and Africa (APMEA) at Apollo Tyres, echoed Mehta’s views. “The increase in import duty on certain finished goods (in the auto sector) is positive for the Make in India programme and will aid in domestic value addition. The move to include truck and bus radials in the list of items on which import duty has been increased is welcome. This will help increase capacity utilisation levels in radial tyre manufacturing.”

Domestic medical device makers, on the other hand, say the government has not done much to protect local industry. “When the exemption list arrived in the evening on Thursday, we were really disappointed. Giving an exemption of 2.5 per cent to importers (of medical devices) effectively means there is no net change in Customs duty (it was raised to 10 per cent from 7.5 per cent in the Budget). This will definitely not trigger Make in India,” said Rajiv Nath, forum coordinator, Association of Indian Medical Device Industry.

The market size of the medical devices industry in India is Rs 640 billion. Import dependency, however, remains high with 70-90 per of medical devices imported from abroad.