At Home and Abroad, India’s Recent Import Duty Hikes Draw Criticism and Confusion

With 'Make in India' struggling to make headway, the Modi government has fallen back on hiking import duty in the latest Budget. Will India’s trading partners retaliate?

New Delhi: With the Make in India programme struggling to make headway, the Narendra Modi government has resorted to import duty hikes on products ranging from mobile phones and auto parts to fruit juice, in the latest Union Budget. The government’s knee-jerk reaction has left trade diplomats and prime minister’s top economic advisers puzzled.

As the US President Donald Trump has pointed out, India’s average tariff for industrial products is still much higher compared to developed countries where, after several rounds of trade liberalisation, import duties for these items have come down to zero or close to zero.

During his discussion with Congress members about  the steel industry on Thursday, Trump criticised India for slapping high import duty on the iconic Harley-Davidson motorcycles. In retaliation, Trump threatened to increase import tariff on “thousands and thousands” of Indian motorcycles which come to the US.

Import of motorcycles with engine capacity of 800 cc or less,  used to attract 60% duty, while those with capacity of 800 cc or more attracted 75% duty.

But on February 12, the Central Board of Excise and Customs slashed the duty on both these variants of motorcycles imported as completely built units (CBU) to 50%.

Referring to his recent conversation with the Indian prime minister in this context, Trump said, “And a great gentleman called me from India and he said, we have just reduced the tariff on motorcycles, reduced it down to 50% from 75%, and even 100%.”

“… If you are Harley Davidson, you have 50% to 75% tax, tariff to get your motorcycle, your product in. And yet they sell thousands and thousands of motorcycles, which a lot of people don’t know, from India into the United States. You know what our tax is? Nothing,” he told the lawmakers.

Meanwhile, analysts say the recent import tariff hikes by the Indian government will encourage local assembly rather than manufacturing as envisaged under the flagship programme. There is also the risk that the decision could boomerang if it led to trading partners retaliating against India’s exports, hitting its manufacturing sector.

The move, which is an echo of the import substitution policy followed by India in 60s and 70s, is more startling because it came soon after Prime Minister Modi lambasted trade protectionism in his inaugural address to the World Economic Forum on January 23 in Davos, equating it with terrorism and , thereby, positioning India as champion of globalisation.

The Indian prime minister drew huge applause for his unequivocal stand on globalisation from head honchos of world’s leading corporations assembled for the annual jamboree.

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“Instead of globalisation, the power of protectionism is putting its head up. Their wish is not only to save themselves from globalisation, but to change the natural flow of globalisation. The result of this is that we are seeing new types of tariff and non-tariff-based barriers being imposed. Bilateral and multilateral trade negotiations appear to have come to a halt,” Modi said at the WEF.

He further stated, “Most nations have seen a decrease in cross-border financial investments and a drop in global supply chain. The solution to this worrisome situation against globalisation is not isolation.”

In an oblique reference to Trump’s America first policy, Modi said, “Many countries are becoming inward focused and globalisation is shrinking and such tendencies cannot be considered lesser risk than terrorism or climate change.”

The prime minister’s denunciation of protectionism had come just hours after Trump imposed punitive duties on solar equipment imports and at a time when Indian industry was lobbying for relief from cheap imports.

NITI Aayog, EAC puzzled

The latest round of customs tariff hikes has baffled even Modi’s top economic policy advisers including NITI Aayog vice chairman Rajiv Kumar and members of Prime Minister’s Economic Advisory Council (PM-EAC), Surjit Bhalla and Rathin Roy.

Speaking at a recent seminar, Kumar said he hoped that higher tariffs in the budget were a “temporary phenomenon”.

“I hope this is a temporary phenomenon,” the Aayog VC said at a discussion on the budget at the Vivekananda International Foundation.

“Make in India has not been as successful as we had thought and therefore the budget has taken the route of greater import tariffs to give manufacturing a targeted approach like we did in the case of Maruti (Suzuki).”

Bhalla voiced concern over the imposition of long-term capital gains tax on stocks in the budget, saying the country was back on the path of protectionism.

Roy said the country’s credibility has been impacted due to breach of the fiscal deficit target.

Finance minister Arun Jaitley had raised custom duty on imported juices, vegetable oils, furniture, smartwatches, auto components and imported phones among other items in the latest Budget. Credit: Reuters

Kumar urged the two members of EAC-PM to inform the prime minister about their worries about the budget. “I hope the EAC-PM is sending a memo to PM on the wrong choices made in this year’s budget as two of its four members are saying so,” Kumar said.

Kumar’s predecessor Arvind Panagariya too has flayed announcement of tariff hikes in the budget, calling it a regressive move. A new generation of bureaucrats is on course to erect the wall of protection all over again, the former Aayog VC wrote in an article published in the Economic Times.

Finance minister Arun Jaitley had raised custom duty on imported juices, vegetable oils, furniture, smartwatches, auto components and imported phones among other items in the latest Budget, on the ground that there was substantial potential for domestic value addition in these sectors.

India started liberalising its trade and investment policies from early 1990s under Prime Minister P.V. Narasimha Rao. Successive governments continued with the liberalisation drive. As a result, top industrial tariff rate fell from 355% in 1990-91 to 10% in 2007-08 and the share of trade expanded in the country’s GDP.

Economists  believe that 8% plus average annual GDP growth that the Indian economy posted  for nine years starting from 2003-04 was possible because of economic liberalisation.

The ill-thought-out tariff hikes are a retrograde step and could hit country’s long-term economic growth prospects, say economists.

Will India’s trading partners retaliate?

Germany, which is likely to bear the brunt of tariff hikes on auto parts, has hinted that it could take retaliatory action against India’s exports.

Reacting to tariff hike on auto parts, Martin Ney, Germany’s ambassador to India, said that instead of taking protective measures, India should negotiate a free trade pact with the European Union.

German companies have invested $9.7 billion in India since 2000, creating four lakh jobs directly and indirectly and “bringing Make in India to life”, Ney said, while speaking at a press conference on the sidelines of a recent auto-components exhibition.

“I don’t understand the hike in customs duty on auto components. If India wants its GDP to grow at 8% and wants to increase exports, then it needs to allow easy import too,” he said.

Germany’s leading car makers – Mercedes-Benz, Audi and BMW – import kits in completely knocked down (CKD) condition and do assembly here to avoid high import tax on fully built vehicles. But the budget proposal covers CKD kits. The higher duty would increase the prices of luxury cars and super bikes. Increased duty will also raise the cost for auto manufacturers that import critical components for their vehicles.

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