Not the best way to prop up industry

Not the best way to prop up industry

The additional import duties on refrigerators, air-conditioners, speakers, footwear, luggage, aviation fuel and so on is a bad move. These bumped-up rates can have two inevitable results. One, trade, already distorted with products routed through countries with which India has preferential trading agreements, will become even more distorted, and some of these products will become more expensive and see their market shrink. Two, in today’s toxic global climate of trade war between Donald Trump’s US and Xi Jinping’s China, India’s tariff hike will signal not defence of the rules-based world trade system by an important emerging market but just the opposite.

Simultaneously, the government has removed the basic customs duty on 35 capital goods used in the manufacture of mobile phones. This comes on top of import duties on mobile phones already announced. Together, it amounts to an industrial policy that promises super-normal profits to local assemblers of mobile phones and tells any would-be producer of capital goods used in the mobile phone space to forget his dreams and look at low-skill assembly instead. The rupee has depreciated about 10% this year and that affords Indian producers significant protection without any duty hikes. Picking winners and losers by removing and padding tariff protection selectively is a throwback to the Planning era when wise men in the government pretended they knew best. The sensible way to encourage Indian manufacturing is to levy uniform, low import duties while making all factor markets work efficiently.

In the last 20 years, manufacturing inflation has been kept in check by competition from imports. The tariff hikes threaten to change that order and have raised concerns among retailers like Ikea, with long-term investment plans.