Importing worries

Raising Customs duties has many downsides

The central government last week raised the Customs duty on a wide variety of electronic goods such as mobile phones, cameras and microwave ovens. According to a notification by the Central Board of Excise and Customs, the hike ranged from 5 to 10 per cent; for instance, imported mobile phones will now be costlier by 5 per cent while microwave ovens may cost 10 per cent more. The government’s justification for the move is that it will force industry to explore local manufacturing of these goods to reduce cost instead of importing, thereby creating jobs in the country. India imported nearly $42 billion worth of telecom instruments, computer hardware and peripherals, electronic components and instruments and consumer electronics goods in 2016-17. Not surprisingly, the move has been welcomed by the domestic industry, which has said that the import duty hike will provide a boost to the government’s Make in India initiative. A less obvious incentive for the government in hiking Customs duty is the boost it might provide to tax collections at a time when there is uncertainty over revenue from the goods and services tax. 

However, raising import duties is not an ideal solution as it has many downsides. Nor is it an accepted way of turning a country’s domestic industry globally competitive. Customs duties do help in protecting a country’s interest in cases of dumping of goods by another country, but that should be done in special cases only and a decision to raise such duties must balance the interests of consumers with the likely protection it provides local manufacturers. Many companies do not want to manufacture in India as they still find it difficult to do business in the country or because the market is not large enough. The government needs to sort out the problems companies face in terms of land acquisition, lack of adequate infrastructure, and stringent labour laws. Instead of increasing the competitiveness of the economy, the move to put up higher barriers will force Indian customers to either buy inferior products or pay for the inefficiency of a domestic manufacturer. Moreover, raising Customs duties is not a sustainable way of shoring up domestic industry. On the contrary, the protection provided by higher duties is more likely to reward continued inefficiency and lead to hectic lobbying by manufacturers in other industry segments to push for similar protection from imports. 

The increase in Customs duties has already run into rough weather with many competing countries resenting it and calling it a violation of norms established by the World Trade Organization (WTO). The US, the EU and Japan have claimed India’s decision to raise the duty on some telecom products violates the information technology agreement (ITA-1) of the WTO. India must now convince others why this hike, under emergency powers in its Customs laws, does not violate WTO norms. Overall, forcing import substitution behind high tariff walls is not a good way to promote Make in India, as tariffs allow inefficient firms to profit in a protected industry and companies that spend money on research and development may be priced out by those continuing to use inefficient methods or copying the improvements and undercutting the price.