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Import Duty Hike: Will the budget provision spur local manufacturing?

April 06, 2018

As expected, the Union Budget 2018 has provided an impetus to the Make in India initiative. In the telecom sector, it has increased the import duty on mobile handsets, the third hike since July 2017, and associated components. According to the government, locally manufactured mobile phones now account for 74 per cent of the total phone sales in the country, up from 19 per cent in 2014, when tentative protectionist measures were taken to drive domestic manufacturing. “It is being done keeping in mind the substantial potential for domestic value addition in the sector and will lead to the creation of more jobs in the country,” the finance minister said while presenting the budget.

The impact of the duty hike is likely to be felt domestically and internationally. As a signatory to the World Trade Organization (WTO) and free trade agreements (FTAs) with various countries, India has to comply with international trade norms. The finance minister made an indirect reference to these norms in his speech when he said that levying an import duty was a “calibrated departure from the usual practice of reduction in customs duty”. While the WTO framework states that all signatories have to mandatorily maintain import duties on products such as mobile phones and associated components at zero, the FTAs with countries such as Thailand, Singapore and South Korea state that lower import duty can be imposed on some products. There is no clarity on how the government will address this.

On the domestic front, the duty hike raises a few questions. Some of them are straightforward – Will it lead to an increase in the price of mobile handsets? Will companies like Apple, which were importing handsets, now set up shop in the country? Others are more complex. Will levying import duty, a formula that has been tried and abandoned, spur local manufacturing? What will be the value addition in local manufacturing given the lack of incentives for innovation and research and development (R&D)?

The provision of time-bound fiscal and financial incentives to promote indigenous manufacturing is a part of the government’s phased manufacturing programme (PMP), notified in May 2017. “India is not looking for long-term protection, but only for difficulty mitigation for a short period,” says Bhupesh Raseen, vice-president, corporate affairs, Jivi Mobiles. As more handset components are given fiscal incentives in a bid to push domestic production, local value addition will rise from 10 per cent in 2016-17 to 17 per cent in 2017-18 and 33 per cent in 2019-20.

In the 2018 budget, the import duty on handsets has been increased to 20 per cent, as an incentive for indigenous manufacturers. Import duty was first levied on handsets in July 2017 at the rate of 10 per cent, replacing the countervailing duty and excise duty that had been in effect since 2015-16. Six months later, the import duty was raised to 15 per cent. The levies served the purpose. Companies started making phones in India. But the format was assembly-programming-testing-packaging of  imported semi-knocked-down units. As a result, the import bill of handsets fell but that of telecom equipment rose to about $12 billion. Local value addition remained low at about 17 per cent. Moreover, global companies, particularly the Chinese, gained market share at the cost of homegrown players.

While the import duty on phone components is likely to encourage local manufacturing, high-value addition will only take place with the introduction of surface-mounted technology (SMT). However, SMT, which enables the assembly of electronic components with automated machines on the surface of the printed circuit board (PCB), is still a distant reality. With appropriate incentives, PCB assembly can be done locally, adding 20-25 per cent value. Currently, there is no duty on PCB or its assembly. This should have been addressed by the 2018 budget, as per the PMP timeline, and its omission has left the industry puzzled.

Instead, the budget levies a 10 per cent import duty on PCBs of chargers (not phones) and 15 per cent on LCD panels. Moreover, duty on lithium-ion batteries has been increased to 20 per cent (from 10 per cent earlier), and on chargers, adapters, battery packs, wired headsets, receivers, keypads, antennas, side keys and USB cables to 15 per cent (from 10 per cent). While this is a move in the right direction, these components are low on the value chain.

With regard to mobile phone prices, Apple, which imports a majority of the handsets sold in India, has already stated that its handsets will be dearer by Rs 1,120-Rs 3,213, depending on the model. On an average, an effective price increase would be in the range of 1-2 per cent only, experts believe.

India’s pre-liberalisation economic experience indicates that protectionist policies are not enough to promote indigenous manufacturing. An entire ecosystem has to be in place for indigenous manufacturing to flourish. The PMP aims for this. But it is not possible without promoting R&D in design, for which Indian manufacturers still look overseas, and manufacturing high-value components locally.

 
 

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