Union Budget: India's efforts to increase smartphone exports through the production-linked incentive (PLI) scheme face challenges due to high tariffs on input parts and barriers for global firms entering its value chains. Despite the PLI scheme's success in boosting smartphone production beyond domestic demand, these tariffs, averaging 7.4%, are significantly higher than in competitor countries like China's bonded zones where tariffs are 0%.
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BUDGET 2024 EXPECTATIONS | High tariffs on input parts and barriers to entry for leading firms in the global value chains has hindered further growth in increasing India’s share of smartphone exports with the help of the production-linked incentive scheme.
The electronics industry has asked to reduce input tariffs in the upcoming union budget, which at around 7.4% on average as compared to 0% in China’s bonded zones, is undoing the benefit from the PLI scheme which has propelled smartphone production to exceed domestic demand and become the third largest exported commodity from India in FY24, according to government data.
The industry has also asked for a relaxation in the government’s Press Note 3 (which mandates investments from bordering countries to require government approval), to attract lead firms in global value chains to India.
These lead firms in the global electronics component and sub-assembly ecosystem, primarily look at countries which have low tariffs, high scalability, and higher ease of doing business to set up shop, industry association India Cellular and Electronics Association said. ICEA said that while high tariffs worked to increase mobile phone production, it is a deterrent in increasing domestic value addition or setting up a component ecosystem.
Another industry body, Electronics Industries Association of India (ELCINA) said the rates offered under the government’s RoDTEP (Remission of Duties and Taxes on Export Products) scheme is discouraging and far below the previous benefits given to exporters, stating that the electronics manufacturing companies are suffering a disability of 8-10% as compared to their international counterparts, demanding a 4-5% benefit to exports in the union budget.
It has recommended a glide path to tariff reduction on input parts to match competitiveness of China and Vietnam, stating that any revenue foregone due to a reduction in tariffs will be more than compensated by additional revenue generated from higher domestic value addition.
“Current high tariffs increase manufacturing costs in India by 7-7.5% on the bill of materials (BoM), deterring local ecosystem development, hampering exports and adversely impacting job creation,” said Pankaj Mohindroo, chairman, ICEA.
The industry association has also sought Rs 40,000-45,000 crore incentive package to develop a component and sub-assembly ecosystem.
High tariffs, ICEA argued, has a detrimental effect on prices of input parts, encouraging both global and domestic suppliers to charge high prices, which makes manufacturing the end product more expensive as compared to other countries like China and Vietnam.
According to an ICEA study, China had over 56% of its input tariffs set to 0-5%, while that for Vietnam is at a high 97%. India has 42.8% of its tariffs in the 0-5% range, and 51.4% of its input tariffs in 10-20% range.
China has bonded zones where effective input tariffs are 0% across the board, while Vietnam has free-trade agreements with most nations, making input tariffs negligible for the two countries, and putting India at a gross disadvantage.
With its competitive advantage, China’s mobile phone exports from its bonded zones in FY24 was at $866 billion with 38% value addition, while Vietnam exported $130 billion worth of phones, with 24% value addition. During the same period, India exported $29.1 billion worth of smartphones, with 18% value addition.
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