Foxconn won’t make phones if imports are cheaper
Till India had a large enough mobile phone subscriber base, it was obvious few would want to manufacture here, more so given the famed difficulties in setting up/operating production facilities in the country. But, even as India piled up the number of mobile phone subscribers, few companies ventured to produce here. This, however, didn’t deter Prime Minister Narendra Modi and he continued to push for his Make-in-India programme. Over the past few months, several global mobile phone manufacturers have spoken of setting up facilities here in the near future. It’s incorrect to call this ‘manufacturing’ since this is more assembly, but given its huge employment-generating potential, the proposals from Oppo, Xiaomi, LG and original equipment manufacturer Foxconn, among others, were more than welcome. Partly, this was a leap of faith, a belief that Modi would be able to turn things around. And, to a certain extent, he has. For example, Rajasthan has made its labour laws considerably more flexible. The Centre has come out with rules that make labour inspectors less ogre-like and, in some states like Rajasthan, getting land looks like will become easier over a period of time. Electricity remains as much of a work-in-progress as a year ago, but there is clearly no shortage of electricity for a buyer with money.
But it takes more than just faith to commit funds. And that is what finance minister Arun Jaitley’s Budget delivered on when it brought in an excise duty of 1% on Make-in-India phones versus a 12.5% levy on imports. Given the wafer-thin margins in the business, that’s a substantial incentive to produce in India—at long last, India had learned to leverage fiscal policy for Make-in-India. This is where the Central Board of Excise & Customs (CBEC) comes in. In 2002, for reasons best known to itself, CBEC came out with a circular aimed at limiting assembly operations. It said that if mobile phone parts/components were brought in a single consignment, this would be treated as a complete handset—how else were firms to bring in components for assembly? Combine this with the circular that offers two types of import duties—a 12.5% one with no strings attached and a 1% one provided no Cenvat credit being availed in respect of inputs. Not surprising, there has been a flurry of applications to CBEC asking for import duties of 1% to be levied since no input credits are being availed of. In a flash, the duty advantage that a Foxconn could have got by assembling in India has vanished.
The circular can, of course, be rescinded, though there is a Supreme Court ruling that needs to be dealt with as well. The larger point, however, is that the government needs to take into account such anomalies if it wishes to promote Make-in-India. To a certain extent, the last Budget dealt with some of the inverted import duty structures, but according to Ficci, several still remain. Indeed, a task-force on pharmaceuticals has just suggested rationalising duty structures since it found that the duty on active pharmaceutical ingredients (API) is the same as that on finished products, thereby discouraging local production.