The Hindu Business Line : Moves of import

In a refreshingly quick and strategic response to the alarming rise in manufacturing prices that has added fuel to the raging inflation fire, the Government has slashed Customs duties on a specific set of goods. What is particularly heartening is the absence of the usual fanfare and rhetoric that precedes such responses. Import duties have been reduced on cement, various raw materials and capital goods.

Indeed, cement will now attract no import duty; it was taxed at 12.5 per cent. Cement is one of the items in the manufacturing Wholesale Price Index that has contributed significantly to inflation, with its price index zooming by nearly 20 per cent in the past year. Prices of raw materials, such as base metals, stainless steel, and inorganic chemicals, too are on a high. This has pushed up the input costs, for instance, of textiles, one of the other major manufacturing items, in turn adding to the general price rise. Clearly, the Finance Ministry is hoping to kill two birds with one stone as the reduction of the input costs for textiles would keep one of the star export performers globally competitive. One of the problems with inflation getting out of hand in a globally connected economy such as India's is the danger of loss of competitiveness. While other countries — Japan, for instance — may subsidise exports even after domestic prices rise, clearly this is not an option for a transitional economy such as India's.

One clear indication of the alertness of the policymaker is the fact that traditionally Customs duty cuts of this magnitude are presented in the Union Budget, the next one just a little over a month away. Clearly, the latest move has major implications for the domestic industries that will have to face competition from imports necessary to bridge the supply-demand gap that has contributed to the rising domestic raw material prices. The Finance Ministry must resist pressures for a reversal of the cuts, as domestic producers feel the heat of cheaper imports. Killing three birds with one stone, the Finance Ministry has reduced duties on project imports to 7.5 per cent from 12.5 per cent. A reduction of this magnitude should entice more global investors than have come so far into the sector that has also added to inflation by its backwardness.

The duty cuts on raw materials and project imports will work in mitigating inflation to the extent that it is stoked by manufacturing prices. But unless foodgrain prices are dampened, inflation will continue to haunt the economy.

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