Raising tariffs on select electronic goods beats logic

by Mahesh Vyas

On December 14, 2017 the government raised import duties on microwave ovens (from 10 per cent to 20 per cent), mobile phones (from 10 per cent to 15 per cent), television cameras, digital cameras, video camera recorders, digital video recorders (10 to 15 per cent), CCTV/IP cameras (10 to 15 per cent), televisions (10 to 20 per cent), LED lamps (10 to 20 per cent), smart electricity meters (10 to 15 per cent) and LCD/LED/OLED panels for TV (7.5 per cent).

Apparently, this hike has been done to protect domestic industries and support the government’s “Make in India” program.

But, this move beats logic on two counts.

First, we do not find the products whose tariffs have been raised to display any threat to domestic industries through a surge in their imports. Collectively, the import of these items during April-September 2017 was worth USD 3,495.5 million. This is lower than the USD 3,918.3 million worth of imports of these items during April-September 2016.

India’s imports of select electronic items
Tariff code Description Country USD Million % change
      Apr-Sep 16 Apr-Sep 17  
85165000 Microwave ovens World 28 42 49.7
    China 18 27 49.4
85171210 Push button type World 26 86 232.1
    China 24 84 249.7
85171290 Other mobile World 1,980 1,428 -27.9
    China 1,903 1,402 -26.3
85219090 Other video recording apparatus World 1,067 925 -13.3
    China 890 853 -4.1
852580 TV cameras, digital video cameras etc. World 301 411 36.7
    China 138 215 56.2
85287100 Other reception apparatus for TV etc. World 184 162 -11.8
    China 86 54 -37.4
852872 Colour and LCD TVs World 334 431 29.4
    China 140 162 15.6
85395000 LED lamps World   10  
    China   10  
Sum of above   World 3,918 3,496 -10.8
    China 3,198 2,807 -12.2

China accounts for 80 per cent of these imports. And, its share has declined from 81.6 per cent in the year-ago period.

It is not clear why the government chose to raise tariffs of products whose imports during the current year were lower than in the previous year.

The fall in imports of these products is in contrast with the rising imports of electronics group as a whole. During April-November 2017, imports of electronic goods were 30.8 per cent higher compared to a year ago. Over half of all electronic goods imports come from China whose share in total electronic imports has risen to 52 per cent. However, the share of China in the eight items whose tariffs have been raised is much higher at 80 per cent, but has fallen over the past year.

The elusive rationale to raise tariff against these products apart, protecting domestic industry through trade barriers is generally not considered to be the best solution to achieve growth of an industry. This is the conventional wisdom of economists. We believe that besides this conventional wisdom, the government’s move may not even solve the problem of the industry. This is because the problem is probably not competition from imports but a fall in domestic demand. This is the second reason why the raised tariffs do not make sense.

A fall in demand is evident from consumer responses to a question regarding their propensity to buy consumer durables. Consumer durables is a lot more than electronic goods but the electronic goods on which import duties have been raised do form part of consumer durables.

We find that the proportion of respondents who said that this was a good time to buy consumer durables declined very marginally between early 2016 and now - from about 27.3 per cent to 27 per cent. However, the proportion of respondents who said this was not a good time to buy consumer durables has risen substantially from about 16 per cent in early 2016 to nearly 24 per cent now.

It is worth recognising that the proportion of households who were ambivalent regarding decisions to buy durables has declined from about 57 per cent to 49 per cent and all those who have started taking a view have been taking a negative view on buying consumer durables.

This is a clear reflection of weak demand for consumer durables. Policy decisions to change tariffs need to recognise that increasing prices (which is what the tariff hikes will do) during a period of weak demand will only make demand weaker. It is reasonably safe to assume that the demand for consumer durables is price elastic particularly in a period when demand is weak.

On the supply side it is unlikely that imports will slow down any further in response to the hike in tariffs because exporters to India like China could very well drop prices to offset the increase in tariffs.

CMIE STATISTICS
Unemployment Rate
Per cent
5.4 -0.0
Consumer Sentiments Index
Base September-December 2015
95.6 0.0
Consumer Expectations Index
Base September-December 2015
96.0 0.0
Current Economic Conditions Index
Base September-December 2015
95.0 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Sep 17 Dec 17 Mar 18 Jun 18
New projects 1.25 1.49 3.60 2.27
Completed projects 1.25 1.15 1.42 0.86
Stalled projects 0.69 0.88 3.41 0.30
Revived projects 0.34 0.22 0.26 0.22
Implementation stalled projects 0.78 0.71 1.92 0.03
Updated on: 16 Jul 2018 9:20AM
Quarterly Financials of Listed Companies
(% change) Sep 17 Dec 17 Mar 18 Jun 18
All listed Companies
 Income 7.9 12.0 10.4 18.1
 Expenses 9.0 13.0 17.1 21.2
 Net profit -18.0 -14.3 -80.7 7.3
 PAT margin (%) 5.5 4.8 1.2 19.3
 Count of Cos. 4,501 4,491 4,280 25
Non-financial Companies
 Income 8.2 13.3 11.9 18.2
 Expenses 8.1 12.3 12.8 22.2
 Net profit -6.0 13.2 -1.6 5.7
 PAT margin (%) 6.2 6.4 6.6 20.1
 Net fixed assets 9.2 11.9
 Current assets 2.9 8.2
 Current liabilities 11.0 10.6
 Borrowings 3.4 1.6
 Reserves & surplus 7.9 8.0
 Count of Cos. 3,466 3,469 3,317 19
Numbers are net of P&E
Updated on: 16 Jul 2018 9:20AM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.8 12.3
 Expenses 5.7 1.9 5.8 17.9
 Net profit 0.1 -9.3 26.2 -51.0
 PAT margin (%) 3.0 2.8 3.5 3.6
 Assets 9.5 10.2 7.3 14.1
 Net worth 8.5 11.3 7.0 11.0
 RONW (%) 5.8 4.9 5.9 4.8
 Count of Cos. 26,056 24,316 21,815 218
Non-financial Companies
 Income 4.8 1.0 5.7 9.8
 Expenses 5.0 0.3 5.9 9.3
 Net profit -8.5 20.4 21.4 11.9
 PAT margin (%) 2.0 2.5 3.0 13.4
 Net fixed assets 13.3 17.4 6.5 21.2
 Net worth 7.0 12.0 5.7 5.3
 RONW (%) 4.6 5.2 6.1 17.7
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 16.0
 Net working capital cycle (days) 66 65 62 -12
 Count of Cos. 21,269 20,387 18,246 150
Numbers are net of P&E
Updated on: 04 Jul 2018 4:50PM