Indian Mobile manufacturers seek import tariff rationalisation from Budget

Ease on tariff: It is boom time for India's mobile manufacturing sector. Thanks to the Production Linked Incentive Scheme (PLI) that not only transformed the sector but also pushed up exports to levels to unexpected levels.

According to the India Cellular Electronics Association (ICEA), India’s smartphone manufacturing transitioned through three phases: the first one between 2013-2015, when India was importing 78 per cent smartphones from China, the second phase between 2016-2020, when the industry went on the path of import substitution, and finally from 2021 onwards, when the growth of the sector has been mostly led only by exports. Mobile phone exports are expected to hit 30 per cent of the total production of $49-50 billion in the current fiscal.

It was in FY23 when domestic production of mobile phones exceeded domestic demands and mobile phone export for the first time and became one of the top ten HS six-digit export categories for India. The ranking of these exports stabilised during the COVID-19 years and then increased rapidly in 2022-2023. 

“A 91 per cent increase in these exports in 2022-2023 enabled smartphones to rank among India’s top five export items considered at six-digit HS product categories,” a member of ICEA told Republic Business. According to ICEA, in FY23, the sector manufactured mobile phones to the tune of $44 billion, leading to a total job creation of 12,00,000. 

The sector which has the potential to grow in leaps and bounds is seeking tariff competitive re-alignment in comparison to its competitive nations like China, Vietnam, and Mexico. 

“Tariffs must converge at the Vietnamese and Chinese levels by FY27 to ensure competitiveness, scale, and exports from India,” the association added. 

“Tariffs on inputs have been increased in India to encourage domestic production of products. If the extent of localisation remains relatively low despite prolonged tariff protection, then the outcomes are likely influenced by either technical or business-related constraints,” the ICEA report added.

According to Pankaj Mohindroo, to increase sales of production, India needs to export and participate in global GVCs (Global Value Chain). “Shifting GVCs to India requires low tariffs on components, sub-assemblies, and final products. Therefore, tariffs on sub-assemblies and components should be reduced immediately to attract supply chains for these sub-assemblies,” Mahindroo added further.
The top competitors of India as far as mobile manufacturing is concerned are China, Vietnam, Mexico, and Thailand. The export of mobile from China in 2022 stood at $959 billion, followed by Vietnam at $120 billion, Mexico at $103 billion, and finally Thailand at $57 billion. 

Since 2016, India has been increasing tariffs on sub-assemblies and components whereas China and Vietnam have been reducing their tariffs consistently. The tariff increase has meant that for both China and Vietnam have a lower bill of mobile (BoM) by approximately 8-10 per cent to India.

The Sector’s Demands 

After 2018-2019, India’s mobile phones sector has entered a new phase. Since 2019-2020, domestic production exceeded domestic demand. Exports now provide the major stimulus for the growth of the sector. 
“Export will now drive major growth, the growth of the sector now depends on exports which is the extent to which Indian producers can gain global markets through their competitive positions.  This implies that the policy measures need to focus on improving the competitiveness of India’s mobile phone sector,” the ICEA report said.

The concern is about India’s tariff policy for the mobile sector, which imposes relatively high tariffs on the input of mobile phones and the final products when compared with nations like China, and Vietnam.

Imposing higher tariffs on components and sub-assemblies creates a protected domestic market for the products concerned. However, localisation does not substantially increase due to two main factors. The first is the lack of skills and technology needed to produce the input. Second, the overall aggregate demand necessary for domestic investment in some inputs is much larger than the demand created by the prevailing production level. This deters businesses from investing in domestic production.

According to ICEA, all the tariff lines that increase cost significantly should be brought down to zero. These should include components of complex sub-assemblies.  India currently has one of the most complex tariff structures with multiple tariff slabs. These need to be simplified and reduced to fewer slabs. A simplified and structured glide path with three slabs that is 0 per cent, 5 per cent, 10 per cent should be brought in by 2025. 

Tariff Duty Rationalisation

The association is demanding the rationalisation of import duties to boost exports, and to make exports competitive. India has much higher simple average tariffs than either China or Vietnam. For most favoured nation tariffs, India’s simple average tariffs are much higher than China.

India’s simple average tariff stands at 8.5 per cent, and for China is 3.7 per cent. Similarly, the FTA weighted average tariffs, India’s simple average tariffs is 6.8 per cent compared to Vietnam’s 0.7 per cent. 
“Tariffs impact behaviour. Tariffs have not worked as a policy intervention to expand components and sub-assemblies even after 6 years. There is sufficient evidence to show that high tariffs adversely impact export competitiveness,” the report added. 

Both China and Vietnam have more tariff lines with zero tariffs than India. While India has about one-quarter of the compared lines with Zero tariffs, China and Vietnam respectively have 54 per cent of their tariff lines with zero tariffs. 
The highest MNF tariff of China is 10 per cent. However, in contrast, about 54 per cent of India’s tariff lines have MFN tariffs greater than 10 per cent.  Similarly, for FTA weighted average tariffs, the highest tariffs of Vietnam are less than 10 per cent.  About 97 per cent of Vietnam tariffs are between zero and 5 per cent. India has almost one-third of the tariff lines with FTA weighted average tariffs of above 10 per cent. 

“Tariffs perpetuate import dependency driving uncompetitiveness,” Pankaj Mahindroo, Chairman of ICEA said.  Mahindroo added further to attract global value chains, India is not competing only with companies but needs to compete with countries. 

The “others” category of parts of smartphones/mobile phones should be brought down from 15 to 10 per cent to reduce instances if misinterpretation and all avoidable litigation.