Report says higher customs duty will result in costlier consumer products

The prices of consumer durables like air conditioners, refrigerators and washing machines, are expected to rise following the government's move to impose higher customs duty, coupled with a weak currency, according to a report by Edelweiss Investment Research Thursday.

The government Wednesday had doubled the customs duty on imported air conditioners, household refrigerators, and washing machine weighing less than 10 kg from 10 percent to 20 percent. Compressors for air conditioners and refrigerators will now attract 10 percent customs duty, instead of 7.5 percent earlier.

"In view of a 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," the report said. According to the report, imports account for 25-27 percent of total domestic demand as most players have either set up own assembling unit or are dependent on contract manufacturers who assemble on their behalf.

It can be noted that the domestic currency has lost about 11 percent of its value since January against the US dollar, and closed at Rs 72.59 Thursday.

The report also expects the demand for consumer durables to get impacted in the near-term due to inflationary impact of hike in duty and higher interest cost on consumer loans, which in turn can slightly impact the revenue growth of contract manufacturers in FY19.

"However, the contract manufacturers can benefit due to the expansion of market size over the medium-term on the expectation of a shift in imported finished products to assembling of products in India," it said.

The country's air conditioner market was estimated to be around Rs 20,000 crore in FY18 and imports accounted for nearly 30 percent of the domestic market, the report said.

India imports AC mainly from China and Thailand, accounting for 96 per cent of total imports. The refrigerator market was around Rs 19,500 crore in FY18, and imports accounted for nearly 20 percent of the total domestic market, according to the report, while the washing machine market was pegged to be around Rs 7,000 crore, and imports accounted for roughly 20 percent.