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Raising Import Duties Can Be Counter-Productive

The recent government move to raise import duties on a host of products in a bid to contain current account deficit (CAD) can be counter-productive and does not augur well for the economy, eminent economist and former vice-chairman of Niti Aayog Arvind Panagariya has cautioned.

The government and the central bank, however, have done the right thing by just managing rupee volatility instead of turning extra aggressive in their defence of the domestic currency that recently breached the 74-mark against the dollar before pulling back.

Panagariya also suggested that India need not make its demand for further liberalization in the movement of skilled professionals across borders a ‘make-or-break point’, while negotiating free-trade deals like RCEP. Instead, it should be flexible enough to get the best deal for itself in promoting goods trade. As for the concerns about the worsening CAD, Panagariya said the deficit is unlikely to touch 3 percent of GDP, as is being forecast by the International Monetary Fund and some analysts. But even if it touches 3 percent, it’s manageable.

Making a case for keeping trade as free as possible, Panagariya said: “My view is that it (raising import duties) won’t help the economy because only after removing protective tariffs did India grow at a reasonable pace. We grew at an average 7.6 percent between FY04 and FY18 due to openness. If we go back to protectionism, it’s not right,” Panagariya told FE in an interview. In recent months, the government has cracked down on what it called ‘non-essential imports’, including those of electronics and some other consumer goods, to trim the CAD and contain its negative impact on the rupee.

Analysts have already expressed skepticism about the efficacy of the government’s duty hike in 19 items in September, saying at Rs 86,000 crore, purchases of these items accounted for only 2.5 percent of total merchandise imports and 0.5 percent of nominal GDP in 2017-18. The government followed it up by increasing the tariff on more than a dozen other goods in October. Purchases of certain items from overseas saw a massive jump this fiscal. For instance, between April and July, imports of electric machinery surged 44 percent, machine tools 43 per cent, ship, boat and floating objects 36 percent, ferrous scrap 34 percent and aluminum 32 percent. The import value of each of these items was above USD 1 billion. Even coal imports jumped 28 percent to USD 11 billion up to July. Given that foreign portfolio investors have turned net sellers in 2018 amid an emerging market sell-off, triggered partly by the US interest rate hike, the rupee has been under pressure.

Already, it has emerged as Asia’s worst-performing currency, having shed around 12 per cent against the greenback in 2018.

Already, a panel under commerce and industry minister Suresh Prabhu has asked as many as 15 ministries/departments, which oversee around 80 percent of India’s imports, to chalk out specific plans urgently to substitute certain imports through higher local production.

The items on which the government raised import duties by up to a maximum of 10 percentage points in September included aviation turbine fuel, gold jewelry, semi-processed diamonds, air-conditioners, refrigerators, washing machines (up to 10 kg), footwear, certain car tyres and plastic products.— The Indian Express

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