Union Budget 2019 India: While presenting 2018-19 Budget, then finance minister Arun Jaitley was unequivocal in declaring that he was using customs duties as a policy instrument for "incentivising domestic value-addition" and push forward Make-in-India. Duties were raised in sectors like mobile phones, auto components, footwear and furniture.
Jaitley was clear he was effecting a reversal of the import liberalisation policies that were initiated by the Narasimha Rao government in 1991. In this year's Interim Budget, acting finance minister Piyush Goyal spoke of benefits resulting from tariff hikes, namely the increased domestic production of mobile phones.
There was, therefore, considerable interest as to whether Nirmala Sitharaman walks down the path of yet again using customs duties to revive the fortunes of domestic manufacturing. Like her predecessors, she indicated she would also be raising duties "for achieving higher domestic value-addition through Make-in-India, and reducing import dependence." She announced that customs duties have been hiked in several products to provide domestic industry a level-playing field. The products range from cashew kernels to auto parts, synthetic rubber and electronic products.
However, to ensure that value-addition does take place in the country, policies like making infrastructure facilitates efficient and more responsive to the needs of the manufacturing sector are vital. Although she indicated the government would be focusing on these issues, she would have to ensure the government backs her intent with adequate financial resources.
Her decision to continue with the policies of using import protection came even after the high-level advisory group on trade headed by Surjit Bhalla had recommended that India would do well not to increase import duties even when the US was raising trade barriers against India.
During the last three decades, India's neighbours, especially China, used measures to promote their domestic manufacturing, which then found easy access to the open Indian market. This situation became worse after India entered into FTAs with ASEAN, Korea and Japan. During this decade, India's trade balance with FTA partners has deteriorated as its imports increased, benefiting from preferential tariffs, while exports remained sticky as domestic manufacturing suffered due to lack of incentives.
The government has realised that without putting effective brakes on imports using border measures like customs duties, revival of India's manufacturing sector would be well-nigh impossible. Incentivising domestic manufacturing is also vital for ensuring that India's exports are provided the necessary momentum.
In its first term in office, the government enjoyed favourable situation on the external front due to low crude oil prices. The increases in crude oil prices in 2018, though hardly comparable to the pre-2014 hikes, were enough to reverse the declining trends in CAD. With the global economy slipping into uncertain territory, the favourable trends in oil prices could soon be history, and this would put pressure on India's current account.
The FM would, therefore, have to calibrate customs duties to keep Indian business interested in investing in productive capacities in the country.
(The author is Professor, JNU)