Customs duty may not be cut

Indias road map for reducing customs duty to Asean levels by the next fiscal has hit a speed bump created by the rupees appreciation.

The government remains committed to reducing the peak rates to the Asean level of 5% to 10%. But the stronger rupee has made it do a re-think on whether to go in for cutting peak duty in the coming Budget, sources close to the development said. Indias peak customs duty is 10%.

The rupee, which has gained about 12.5% vis--vis the dollar this fiscal, has not only hit the profit margins of exporters but has also flooded the domestic market with imports that have become much cheaper. According to latest data, the growth rate of the countrys exports has dipped to 8.02% in rupee terms between April and November, while imports have risen by 12.43% during the same period.

The country has already reduced the peak rate to 10% this fiscal, which comes close to the Asean levels. The government can wait another year before going in for another rate cut, the sources said.

Officials pointed out that a final decision in this regard was usually a relatively easy one to make in the Budget, but has been held back this year. Slashing the peak rates further to about 8.5% in Budget 2008-09 could be an alternative.

The division of opinion is not restricted to the finance ministry. Nagesh Kumar, director-general, Research and Information System for Developing and Non-aligned Countries, said, The purpose of a duty cut is to expose the Indian industry to foreign competition. However, the appreciation of the rupee by over 12% has already made imports so much cheaper. So, a duty cut may not be required next fiscal.

However, R Muralidharan, associate director, PriceWaterhouseCoopers, said, Once the government has decided to go to the Asean level of customs duty rates, temporary aberrations such as changes in foreign exchange rates should not delay the fiscal programme.