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India’s Smartphone Export Ambitions at Risk: The Urgent Need to Address Tariff Challenges

13th February, 2024| By Business Desk
Mobile phone in show room | Credit: Flickr
  • India’s Deputy IT Minister warns of the country’s risk of losing out to China and Vietnam in becoming a major smartphone export hub due to high tariffs.
  • Smartphone manufacturing is a crucial part of Prime Minister Narendra Modi’s economic agenda, but high tariffs hinder competitiveness against other manufacturing destinations.
  • Lower tariffs on components are essential to attract global smartphone manufacturers to India.
  • Despite recent production boosts by major companies like Apple, Foxconn, and Xiaomi, India’s share of global electronics manufacturing remains low at 4%.
  • India’s focus should shift towards increasing exports rather than relying solely on the domestic market, necessitating a revision of tariff policies to align with export ambitions.

India’s endeavor to establish itself as a prominent smartphone export hub faces jeopardy against the competition posed by China and Vietnam, as revealed in government documents accessed by Reuters. The Deputy IT Minister emphasized the urgency for India to swiftly implement measures to entice global companies, suggesting that lower tariffs could be instrumental in achieving this objective.

Under Prime Minister Narendra Modi’s leadership, smartphone manufacturing stands as a pivotal component of India’s economic advancement strategy, aimed at stimulating growth and generating employment opportunities. The country, boasting the world’s second-largest mobile market, witnessed a commendable 16% year-on-year increase in production, totaling $44 billion in the previous year.

The Indian government attributes this success predominantly to the financial incentives extended to companies to bolster production. However, concerns have emerged among lawmakers and advocacy groups representing major players like Apple regarding the deterrent effect of India’s high tariffs on the diversification of supply chains away from China. Nations such as Vietnam, Thailand, and Mexico have surged ahead in smartphone exports by offering more competitive tariff structures on components.

A communication dated January 3, accompanied by a confidential presentation authored by Deputy IT Minister Rajeev Chandrasekhar and directed to the Finance Minister, underscores the ministry’s apprehensions regarding India’s diminishing competitiveness owing to its tariff regime. Chandrasekhar highlighted India’s elevated production costs resulting from imposing the highest tariffs among key manufacturing destinations. He underscored the imperative for prompt action to prevent the relocation of supply chains to alternative destinations like Vietnam, Mexico, and Thailand.

Central to India’s aspirations of attracting smartphone manufacturers is the imperative of reducing tariffs on components. While “Made in India” phones incorporate numerous locally sourced parts, companies resort to importing high-end components from China and other countries due to limitations in the domestic supply chain. However, these imported components are subjected to steep tariffs, consequently inflating overall costs.

U.S. Ambassador Eric Garcetti recently remarked on the diversion of foreign investments from India to countries like Vietnam, attributing this trend to India’s tariff policies. He cautioned against the adverse impact of taxing inputs, asserting that it restricts market expansion rather than safeguarding it.

Chandrasekhar’s documents underscored the tariff differentials between India and its competitors, notably China and Vietnam, wherein lower taxes have contributed significantly to their export growth. Despite India’s ambition to capture 25% of global electronics manufacturing by 2029, current statistics reveal a meager 4% stake. This glaring disparity underscores the urgency for corrective measures.

Addressing Finance Minister Nirmala Sitharaman, Chandrasekhar advocated for tariff reductions in the annual budget, citing the necessity of aligning India’s tariff policy with its ambitious manufacturing targets. While the finance ministry acceded to some requests, such as reducing taxes on certain components to 10% from 15%, many other tariff reduction proposals were not endorsed.

India currently imposes a 20% tax on various components, including chargers, circuit boards, and fully assembled phones. Chandrasekhar proposed a reduction of these taxes to 15% to enhance competitiveness. He also highlighted the disparity between India and its counterparts like Vietnam and China, which impose tariffs not exceeding 10% on components from their most-favored nation trading partners or nations with whom they have free-trade agreements.

To fortify India’s position in the global smartphone manufacturing landscape, Chandrasekhar emphasized the need to match China and surpass Vietnam in terms of tariff competitiveness to allure global supply chains. He contended that high-tariff regimes invariably fail to attract such investments.

Despite the buoyancy in domestic demand bolstering the profitability of local manufacturing, Chandrasekhar cautioned against overreliance on this aspect, foreseeing saturation in the domestic smartphone market. Consequently, he stressed the imperative of recalibrating India’s strategy towards prioritizing exports over domestic consumption.

In response to Xiaomi’s appeal for tariff reduction on additional components, Chandrasekhar echoed the sentiments of aligning with the tariff structures prevalent in competitive manufacturing economies like China and Vietnam. Emphasizing the necessity of a revised tariff policy to align with India’s ambitious manufacturing and export targets, Chandrasekhar reiterated the urgency of shifting the focus towards exports as the primary driver of growth.