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Has Modi govt just scored a self goal by hiking import duty? A look at the likely implications

Prime Minister Narendra Modi, at the World Economic Forum at Davos on January 23, argued strongly in favour of globalisation and against protectionism. He also invited the world to come and invest in India, with a vision to make India a global manufacturing hub. 

On February 1, as part of Budget proposals, Modi’s government increased basic customs duty, ranging from 5% to 10% on several products, including mobile phones and parts, completely knocked down (CKD) import of motor vehicles, motorcycles and parts, sunglasses, furniture, perfumes and wristwatches. 
GoI believes that this increase is justified in view of the substantial potential for ‘domestic value addition’ in these sectors and employment generation. The message seems to be loud and clear: if you want to access the Indian market, start manufacturing here. 

But will this hike in customs duty really incentivise ‘Make in India’? Not so long ago, the customs duty in India was over 50%. It was gradually bought at par with the Asean level, with peak rate of duty being 10%. There is hardly any empirical evidence to suggest that a high incidence of customs duty resulted in increased manufacturing base. On the contrary, experience shows that the opening up of economy and gradual reduction in tariff barriers and duties incentivised larger global players to set up operations in India. 

In a few cases, however, increase in duty has seen some success. The mobile phone is one such example where higher duty on import has resulted in increase in domestic manufacturing, though largely in the form of the assembly of kits. So, increase in duty on certain parts and accessories of mobile phones appears logical, provided the domestic industry has the necessary technology and infrastructure to start manufacturing these parts in a short period of time. Else, it would potentially increase the cost of manufacturing in India for this growing sector.