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 loose For 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.