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More screwdrivers, less manufactures PDF Print E-mail
Saturday, 03 February 2018 00:00
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By raising import duties on mobile phones, government encouraging more imports, less value addition

Mobile phone manufacture is the most obvious Make-in-India story. From just two in 2014, India has 123 manufacturers today. The output of phones is up from 48 mn to 224 mn and will rise further this year (2018) to 279 mn. Put another way, from a mere 19% in 2014, Made-in-India mobiles are up to 74%, and by the end of 2018, this will rise to 90%.

Yet, based on analysis by Counterpoint, the biggest beneficiaries are firms outside India, probably in China, since the import component is up markedly. Imports of mobile phones are down from 205 mn in 2014 to 77 mn in 2017, but the import bill shot up from $8.8 bn in 2014 to $12.6 bn in 2017, and a likely $13.3 bn in 2018.

While imports of finished phones fell dramatically, those of components rose from $1.4 bn in 2014 to $6.8 bn in 2016 and $9.2 bn in 2017; for 2018, the imports of components will be around $11.4 bn. Low domestic value addition—up from around 3.6% in 2014 to a little over 10% in 2017—is, though, pretty much par for the course. Maruti Suzuki, the pride of India, was at one time as dependent upon imported components. So, surely the same will happen to mobile phones?

Most certainly, provided the policy environment is right. In 2014, India hardly manufactured phones. So, the NDA came up with a policy to ensure quick local value addition. Under WTO rules, what is called the Information Technology Agreement (ITA), import duties on products like mobile phones, and components, were zero and this was inviolable. So, the FM introduced a countervailing duty (CVD)—essentially excise duty, levied on imports—of 12.5% on phones. And, those who manufactured locally, were allowed to pay just 1% provided they took no input tax credits—and they didn’t since the imported inputs attracted no duties. Immediately, there was a rush of firms looking to import components and assemble them in India. The plan was, over a period of time, to see what components could possibly be made in India, and to keep levying a CVD on that. So, if it was felt batteries could be made in India, given the prevailing levels of technology—and a bit of stretch—the CVD on these would be raised for imports. Over time, the plan was, mobile handset manufacturers would make the batteries locally. This would then be done for the headsets…

The plan, however, went for a toss once GST came in since there could no longer be a differential excise/CVD for local production and imports. While some solutions were offered, the government went in for the most controversial one of raising import duties on phones—to 10% initially—despite the ITA agreement.

Fortunately, no one took India to the WTO, and so the policy has stayed. It worked much the same as the earlier one, and so, import duties were to be raised on various parts each year, in consultation with the local industry, to push more local value addition. A phased manufacturing plan was drawn up, that envisaged local value addition rising to 10% in FY17, 17% in FY18 and 33% in FY20. The phased manufacturing plan envisaged chargers/batteries/headsets being the first to be indigenised in FY17; in FY18, the plan included the keypad, the USB cable, the microphone and some other parts. In FY19, the plan was to locally produce the printed circuit board assembly (PCBA) and the camera modules. The PCBA comprises more than half the value of the phone, but not too much of it can be made locally, given the current levels of technology. But, including the design, some antennae and ‘surface mounting’ of components on the PCB can ensure 20-25% of the PCBA’s value can be captured locally.

So here’s the problem. By dramatically hiking the import duty on the phone in the budget, to 20%, the government has given more protection to those simply importing components and putting them together using a screwdriver. Since fewer firms are importing finished phones, there was really no need for the higher 20% duty. In fact, what was required was for an import duty to be put on PCBs, but that was not done, and this remains at zero even today. So, apart from the fact that India looks protectionist by raising duties while every other country is dropping them, by putting this on the finished product instead of the component, the government has ensured local value addition remains minuscule. Only those firms who are interested in importing finished phones instead of value-adding domestically will be cheering the move. And those who have taken a chance on India and have created more value addition facilities here will be ruing this.

Last Updated ( Monday, 05 February 2018 09:04 )
 

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