Impact of import duty reductions on India’s smartphone industry

The reduction in import duties on mobile phone components by the Finance Ministry of India represents a significant policy shift, potentially impacting both domestic and international stakeholders. While the measure is anticipated to benefit major manufacturers such as Apple and Samsung, it has prompted debates within the industry regarding the long-term effects on domestic manufacturing capabilities and overall industry growth.

As India’s smartphone market continues to expand, policymakers face the challenge of navigating these intricate dynamics to foster sustainable and inclusive growth within the sector.

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The Finance Ministry of India made a significant announcement on January 30th, revealing a reduction in import duties on specific mobile phone components. These components, including battery covers, front covers, antennas, SIM sockets, screws, conductive cloth, and LCD conductive foam, will now face a reduced tariff, dropping from 15% to 10%. This decision is expected to have far-reaching implications, particularly benefiting major manufacturers such as Apple and Samsung.

The move comes amidst a backdrop of differing opinions within the industry. The Global Trade Research Initiative (GTRI) in a report recently advised against cutting import duties on electronic components used in smartphone manufacturing, arguing that the existing tariff structure has proven successful. 

“To promote manufacturing, the government announced a differential tax policy. Import of components to manufacture phones attracted only one % countervailing duty. But importing for sale attracted a 12.5% duty. The arbitrage disappeared with the introduction of GST in July 2017. All such firms disappeared simultaneously,” the report said.

However, industry body India Cellular and Electronics Association (ICEA) countered this stance, advocating for import duty cuts on mobile phone components. They suggested that such cuts could potentially increase domestic handset production by a substantial 28%, reaching a market value of US$ 82 billion, while also bolstering exports and supporting indigenous manufacturing efforts.

PTI quoted Ajay Srivastava, co-founder of GTRI, highlighting existing schemes that offer incentives for manufacturers, such as Advance Authorisation and Export Promotion Capital Goods, as well as the benefits of operating within Special Economic Zones (SEZs) or 100% Export Oriented Units. These schemes allow for duty-free imports of necessary inputs or capital goods for manufacturing and exporting electronic items.

Despite differing perspectives, recent data indicates a robust performance by India’s smartphone industry. Exports surged from US$ 7.2 billion in 2022 to US$ 13.9 billion in 2023, becoming the top performer for the PLI scheme by a wide margin and over 98% of smartphones sold within India being domestically manufactured. Ajay Srivastava emphasized the advantages for major players like Apple, which leverage SEZ facilities to export significant volumes without facing import duties on components.

This statement highlights the success of strategic policy interventions, including the Production Linked Incentive (PLI) scheme, which offers 4-6% cash incentives on annual incremental production. Additionally, it underscores the importance of maintaining a disparity in tariffs between smartphones and their components.

However, concerns linger regarding the nation’s increasing reliance on imported electronic components. The rising import bill, climbing from US$ 24.4 billion to US$ 30.7 billion, a 25.5% growth, underscores the significant role of imported components in local manufacturing processes. The GTRI cautioned that reducing import duties on components could potentially discourage deep manufacturing operations within India. Instead, firms may opt for assembling phones from imported kits, rather than investing in local production capabilities.

The report referenced a past tax arbitrage opportunity, wherein firms assembled smartphones from imported Semi Knocked-Down (SKD) kits. However, this opportunity diminished with the introduction of GST in July 2017, leading to the disappearance of such firms. Thus, the ongoing debate surrounding import duties on mobile phone components reflects broader discussions on balancing industry growth with long-term development in India’s rapidly evolving smartphone market.

In conclusion, the reduction in import duties on mobile phone components by the Finance Ministry of India marks a significant policy shift with potential ramifications for both domestic and international stakeholders. While the move is expected to benefit major manufacturers like Apple and Samsung, it has sparked debates within the industry regarding the long-term implications for domestic manufacturing capabilities and industry growth. As India’s smartphone market continues to expand, policymakers must navigate these complex dynamics to ensure sustainable and inclusive growth in the sector.