Centre's duty hike: Domestic manufacturers to benefit but higher cost could spoil festive mood

Sachin Pal, Krishna Karwa & Nitin Agrawal
Moneycontrol Research

In an effort to curb the widening current account deficit and support the falling rupee, the Centre has raised import duty on 19 imported items. The list includes a range of items including air conditioners, refrigerators, washing machines, footwear, jewellery, select moulded plastics and aviation turbine fuel (ATF). These changes will be effective from the midnight of September 26-27.

In June, the government had hiked customs duty on 30 imported items from the US. These ranged from steel products to tube and pipe fittings. Although the duty hikes will have a positive impact on the current account deficit, the impact on companies vary.

Domestic manufacturers stand to benefit
The recent move indicates the government's continued thrust on promoting ‘Make in India’ and making the economy self-reliant. Domestic manufacturers will be able to compete better as the duty hike would reduce the price differential between domestic and imported goods.

Custom hikes could spoil the festive mood
While domestic manufactures could now use reduced competition from imports to hike prices, there seems to be growing concern that the recently announced hike on custom duties will dampen demand during the festive season. The input expense bill for importers is set to soar as the rise in tariffs, coupled with continued fall in the rupee, would crimp their operating margins. Rising cost pressures is likely to place a cap on the lucrative offers during the October-November sale period as any immediate price hike would spoil the already tentative consumer sentiment.

Possibility of tax rate hikes on non-essential items
In the current market environment, the government looks committed to keep a strict check on the import bill and aid tax collections. The increase in customs duty will boost government’s annual tax collection to the tune of around Rs 4,000 crore. This comes at a time when Goods & Services Tax (GST) collections have shown little signs of improvement in the past few months. The monthly tax collections have remained below Rs 1 lakh crore since the highs witnessed in April as the government has been rationalising the GST rate structure in the last few months. The reduction in taxes could be offset through widening of tax net as well as incremental taxes on non-essential items.

Most companies stand to gain but few stand to looseFor an already struggling aviation sector, inclusion of ATF with 5 percent custom duty is expected to further intensify cost pressures of airline companies. The impact, however, would be lower as these players imported around Rs 1,100 crore of ATF as compared to total air fuel bill of Rs 30,000 crore last fiscal.

Domestic tyre manufacturers are expected to benefit from increase in custom duty to 15 percent (from 10 percent earlier) on radial tyres as it is likely to curb imports.

Weak summer conditions in an otherwise seasonally strong Q1 FY19 led to an inventory build-up in air conditioners (AC) across all trade channels. Consequently, near term imports will be negligible since emphasis will be laid on clearing existing stocks.

Blue Star, the leader in AC market, has a 20 percent import dependence at present. This is expected to reduce gradually in the future. In contrast, Voltbek Home Appliances Private, the recently set-up joint venture between Voltas and Arcelik, will import its entire range of refrigerators and washing machines till the manufacturing facility for ‘Voltas Beko’ products at Sanand (Gujarat) turns operational in 2019. Similarly, Havells India will also be negatively impacted as the business requirements of Lloyds are primarily met through imports. But this is expected to change as the company is setting up new manufacturing facilities and realigning the supply chain.

Foreign AC brands will outsource a higher chunk of their product manufacturing processes to contract manufacturer Amber Enterprises India. Compressors, which constitute roughly 30 percent of the AC cost, are primarily imported in India. The import duty on these have only been increased to the tune of 2.5 percent, which the company will pass on to its clients over the medium term. Indoor split ACs would get costlier since manufacturing of the same in India is very limited.

Similarly, consumer durable manufacturers – Dixon Technologies (India) - also stands to benefit from the boost to domestic manufacturing.

White goods majors – Whirlpool on India and IFB Industries – manufacture most of their range of products in India and are also adopting import substitution measures (in connection with raw materials and finished output) at a brisk pace to keep procurement costs low.

For luggage companies, import of executive suitcases, trunks etc. will now attract duties of 15 percent (versus 10 percent earlier). Safari and VIP, the largest players in the domestic market, might go unscathed due to this development as they continue to command superior pricing power on account of their market leadership position.

In jewellery, basic customs duty (BCD) on gold imports, which stood at 10 percent, has been left unchanged to keep smuggling of the yellow metal under check. Titan Company sources diamonds domestically and a 7.5 percent rate of duty on imports of the same won’t have any impact on the company either.

In the footwear segment, the likes of Bata India, Khadim India and Mirza International will be major beneficiaries of the customs duty increase (from 20 percent to 25 percent) since products in the premium range (where foreign brands are typically present) constitute a meaningful portion of their annual revenues.

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