Rolling back mobile component duty bad idea
The government’s decision, last week, to roll back the import duties levied on components of mobile phones in the budget is curious. On February 29, as part of the annual Budget, finance minister Arun Jaitley levied import duties of 29% on mobile phone batteries, chargers, wired headsets and speakers, presumably to encourage firms manufacturing mobile phones in India to start producing these components. Yet, while passing the Finance Bill, these were rolled back, following local manufacturers’ protest that this would reduce their margins and make them less competitive versus imports—if these items comprise, say, 12% of the value of a phone, a 29% import duty on them would effectively mean a 3.5% extra duty on locally made phones.
The argument is specious and it is unfortunate the government got taken in by it. In his 2015 budget, as part of Make-in-India, the finance minister increased the countervailing duty (CVD) on imported phones to 12.5% while retaining an excise duty of 1% on locally manufactured phones, thus giving an 11.5% duty advantage to local firms. Sadly, while this spurred a host of high-profile announcements of firms wanting to make phones in India—and several photo-ops of these plants being inaugurated—the value addition was done in China. With the components imported from China in semi-knocked-down form, there is very little value addition in India, though this enables local manufacturers to pay the lower 1% excise duty instead of the 12.5% CVD. For a country that consumes 250-275 million new mobile phones a year, that’s a very high import burden running into $12-14 billion a year. While it takes many years for full-blown manufacturing of mobile phones—as opposed to mere assembling—to move to a country like India, the government needed to push on its 2015 initiative. One such move could have been introducing a differential CVD on imports of printed circuit boards (PCBs) as was done for mobile phones in 2016—this would have ensured firms did more value addition here as the components of the PCBs would be imported in their native form and some testing as well as design of the PCB would take place locally. This would have raised the local value addition from current 1-2% to 8-10%, with a possibility of improving it further by triggering the local component ecosystem (the majority of components get consumed in a PCB), and local design. Instead, what the budget did was to impose a simple 2% import duty on PCBs—and this too was withdrawn last week. Why will anyone manufacture components or design PCBs in India if the duty structure doesn’t force them to do so? In which case, Indian manufacturers will never add to technology development or IPR generation. If the government doesn’t re-examine its stance, India will continue to get more ‘manufacturing’ of mobile phones locally—expect more photographs of ministers inaugurating these plants—while the real value addition will take place in China. The government had started using differential duties as a tool to incentivise genuine manufacturing but has got swayed by the arguments of local industry and given up on this path. That is an unfortunate development considering that electronic imports are on their way to become India’s largest net imports, surpassing even oil.