Weakness in the rupee makes imports costlier for domestic companies.Diwali shopping must be on your mind but there is something that might derail your plans.
The prices of air conditioners (ACs), washing machines, speakers, refrigerators and other key items like footwear and tableware may pinch you harder than before.
The cost of these items is set to increase for importers, in line with a higher customs duty imposed by the government last week.
The Centre announced a hike in the basic customs duty - or the taxes applicable to imports - on 19 items, with an aim is to contain a widening current account deficit by way of controlling non-essential imports.Some experts say the move along with rupee depreciation could lead to increase in prices of these items."While the rate hike was important in order to narrow down the current account deficitthe timing of the hike will have a major impact on the durables industry with the festive season just around the corner," said CARE Ratings, a credit ratings agency.ItemChange in import dutyACFrom 10% to 20%Household refrigeratorFrom 10% to 20%Washing machine up to 10 KgFrom 10% to 20%SpeakersFrom 10% to 15%FootwearFrom 20% to 25%Bath, shower bath, sink, wash basin of plasticFrom 10% to 15%Tableware, kitchenware and other household items of plasticFrom 10% to 15%Trunk, suitcase, executive case, brief cases, travel bag and other bagsFrom 10% to 15%On household air conditioners, washing machines under 10 kilograms in weight and refrigerators, the customs duty has been doubled from 10 per cent to 20 per cent, according to the official statement from the Ministry of Finance.
Import of speakers, suitcases, brief cases and travel bags now attracts a customs duty of 15 per cent, as against 10 per cent previously."In view of the weak rupee and higher duty, the prices of consumer durable products are proposed to get dearer, which can have a negative impact on demand in the near-future," according to a research report by brokerage Edelweiss.Consumer durable companies with high dependency on imported finished products would be negatively impacted in the near-term, according to the Edelweiss Investment Research report.
Those firms which have high exposure to air conditioners, refrigerators and washing machines and low reliance on imported finished product will gain competitive advantage over their peers.AK Prabhakar, head of research at IDBI Capital, does not expect the prices of these consumer durables to increase.
Asked if consumer durables prices are expected to rise during the festival season, he said: "Prices might not go up really for now rupee has played a spoilsport."The rupee has depreciated more than 13 per cent against the US dollar so far this year.
Weakness in the rupee makes imports costlier for domestic companies."The move on import duty will improve our manufacturing practices," Mr Prabhakar added.Soaring crude oil prices - which are hovering near new four-year highs registered earlier this week - have led to widening of the current account deficit, or the difference between the value of imports and experts when the former exceeds the latter.Current account deficit stood at $15.8 billion, or 2.4 per cent of GDP, at the end of the June quarter, higher than $15.0 billion, or 2.5 per cent of GDP, at the end of the corresponding period a year ago.
GDP growth came in at 8.2 per cent in the April-June period, the highest since January-March 2016.The government had, earlier this month, announced a slew of steps to contain the weakness in the rupee and the ballooning current account deficit.
It planned to cut down "non-necessary" imports, ease overseas borrowing norms for the manufacturing sector and relax norms on masala bonds, or rupee-denominated overseas bonds.Analysts fear limited demand in the market might leave little room for consumer durable companies to pass on the cost to the customer."The companies may not be able to pass on the price rise on account of muted demand in the domestic market post the price drop on washing machines and refrigerators during Jun-Aug 2018 due to GST led rate corrections," CARE Ratings added.
"The final impact in terms of physical import of these goods as well as impact on price inflation is fuzzy."