In a compelling argument presented by the Global Trade Research Initiative (GTRI), the call to maintain current import duties on smartphone components in the upcoming Union Budget 2024-25 has gained significant attention. As Finance Minister Nirmala Sitharaman prepares to unveil the Budget, this perspective urges the government to sustain the existing tariff structure, which has proven to be instrumental in the success of India's burgeoning smartphone manufacturing industry.

A Proven Framework for Success

According to GTRI, the current schemes and tariff structure have yielded substantial success, facilitating duty-free imports of components essential for export production. The think tank cautions against reducing import duties on smartphone components, warning that such a move could lead to an influx of superficial assembly plants heavily dependent on imported parts, thereby contributing minimally to the local economy.

GTRI Founder Ajay Srivastava emphasizes that imported components and subassemblies currently account for up to 90% of the bill of material value for India-made phones. He advocates for maintaining the import tariffs, which range from 0 to 20%, as these are pivotal for several reasons.

The Role of PLI Incentives and Tariff Arbitrage

The production-linked incentive (PLI) scheme has been a cornerstone of India's smartphone manufacturing success story. The scheme, combined with a strategic tariff differentiation between fully assembled phones and their components, has propelled the industry forward. In FY24, India's smartphone production soared to USD 49 billion, with exports witnessing a 42% growth, reaching USD 15.57 billion.

Over 98% of smartphones sold in India are made locally, underscoring the efficacy of policies like the PLI scheme, which offers a 4-6% cash incentive on annual incremental production. GTRI asserts that there is no need to alter a policy that has delivered such remarkable results.

Facilitating Global Competitiveness

Indian manufacturers benefit from schemes like Advance Authorisation, Export Promotion Capital Goods, Special Economic Zones (SEZs), and 100% Export Oriented Units, which allow duty-free imports of necessary inputs and capital goods for manufacturing and exporting electronic items. The customs bond scheme also enables duty-free imports without localization requirements.

A prime example is Apple, which, through its contract manufacturers Foxconn and Wistron, leverages SEZs to manufacture and export smartphones. In 2023, Apple's iPhone production in India exceeded Rs 1 lakh crore (approximately USD 13.5 billion), with exports valued at Rs 65,000 crore. Such schemes have made Indian smartphones globally competitive.

The Risks of Reducing Import Duties

In FY24, electronics imports in India reached USD 83.92 billion, with component imports growing by 36.8% from USD 25.13 billion in FY23 to USD 34.36 billion in FY24. The high reliance on imported parts in local manufacturing highlights the risk that reducing import duties could disincentivize deeper manufacturing operations in India. Firms might resort to assembling phones from nearly complete imported kits, potentially exiting the market once incentives are withdrawn.

Maintaining current import tariffs is crucial for the sustained growth and depth of India's smartphone manufacturing sector. Lowering these tariffs could encourage short-term assembly operations over long-term, valuable manufacturing, undermining the industry's success and future potential.

Catalysts for a Robust Ecosystem

Srivastava argues that these tariffs are not merely protective measures but vital catalysts for fostering a robust, self-reliant smartphone manufacturing ecosystem in India. This ecosystem can compete globally while driving local employment and technological advancement.

Preserving these tariffs is essential for continuing the remarkable growth trajectory and nurturing the deep manufacturing capabilities of India's smartphone sector. As the Union Budget 2024-25 approaches, the government's decision on this matter will be pivotal in shaping the future of India's position in the global smartphone market.