As India goes increasingly protectionist to make the country self-reliant, experts have cautioned that the Budget should not look inwards by introducing measures such as Customs duty hikes, but instead boost infrastructure for domestic manufacturing.
At a time when India prepares its Budget, which, Union Finance Minister Nirmala Sitharaman has said, will be one like “never before”, there are apprehensions the Centre may resort to further duty hikes, like in the past, and, at the same time, shore up its coffers when the pandemic has dwindled its revenues.
The Confederation of Indian Industry (CII), in its representation to the finance ministry, has suggested a graded road map for competitive import tariffs over the next three years. It has recommended the lowest slab of 0-2.5 per cent for inputs or raw material, the highest slab of 5-7.5 per cent for final products, and 2.5-5 per cent for intermediates.
“To protect industry, there’s not always need to resort to protectionist measures. India imports a lot of raw material from other countries, which makes manufacturing finished goods competitive,” said a CII spokesperson. There is an anomaly of inverse duties, because of which industry is suffering, the spokesperson said.
Inverted duty refers to higher duties or taxes on inputs than on output, which results in capital getting blocked. “We can start focusing on creating capacities, which can be done gradually,” the spokesperson said.
Over the past five years, the government has increased Customs duties on products that include electronics, chemicals, and footwear. With the pandemic affecting business, and the government’s increased push to make India self-dependent, the Budget is likely to see more duty hikes.
Cautioning against further protectionist measures, Amit Maheshwari, tax partner at AKM Global, a consulting firm, said: “Seeing negative GDP growth on account of Covid and a rising trade deficit, we need FDI to ensure more jobs, a more competitive market, and an economy that is part of the global supply chain.” The trade deficit rose by 25.78 per cent this year, he said to buttress his point.
While India is increasing import duties to achieve long-term objectives for promoting domestic manufacturing, this should be in line with giving enablers such as infrastructure and other tax benefits, said Krishan Arora, partner at Grant Thornton Bharat LLP.
Although measures such as duty hikes go against global trade, many countries resorted to them to protect and encourage domestic industry, said Abhishek Jain, a partner at EY India.
Customs duty changes can also be expected in sectors where the government intends to promote local production, Jain said.
In line with the production-linked incentive scheme, which incentivises domestic manufacturing, there should be similar benefits for small businesses, said Arora.