Reducing Tariffs for Smartphone Components: Why the Industry Body is Calling for Tariff Cuts

Reducing Tariffs for Smartphone Components: Why the Industry Body is Calling for Tariff Cuts

Sub: Economy

Sec: External economy

The Indian Cellular and Electronics Association (ICEA), an industry body representing mobile and other electronics assembly and manufacturing units, has called for a reduction of tariffs on certain components for smartphones. This demand, on the surface, seems contradictory to the goal of expanding domestic production.

Reasons for Tariff Cuts

• Reducing Input Costs:
  • Obvious Reason: Lowering the costs for smartphone assembly units.
  • Domestic Market Saturation: With domestic demand met, high component tariffs are less justified. Nearly every phone made in India is assembled domestically, with surplus units being exported.
• Nature of Components:
  • Complex Components: Components like Printed Circuit Boards (PCBs) and sub-assemblies are highly complex and not close to being manufactured domestically.
  • High Costs for Local Assembly: Current tariffs increase the cost for local assembly operations as these components still need to be imported.
  • Future Domestic Manufacturing: Domestic production of these components could take around eight years.
• Economic Rationale:
  • Demand and Supply Mismatch: The aggregate demand for certain inputs is much larger than the current production levels, leading to higher assembly costs.
  • Domestic Pricing Strategy: High tariffs cause domestic component makers to price just below the cost of imported components. Cutting tariffs would force them to lower prices, reducing operating expenses for assembly units.

Competitive Re-Alignment

• Global Competitiveness:
  • Comparison with Other Countries: Countries like China, Vietnam, Thailand, and Mexico enjoy lower tariffs due to special exemptions, making their products more competitive.
  • Indian Companies: For Indian companies like Micromax and Lava to compete globally, they need to use the best available technologies regardless of their origin.
• Learning from China:
  • Chinese Example: When China began assembling smartphones, their value addition was minimal. Today, Chinese firms contribute significantly more to manufacturing value by producing high-value components.
  • Need for Scale: Increasing smartphone production and exports is crucial. This requires reducing tariffs and maintaining tariff stability.

Government Support

• Production Linked Incentive Scheme:
  • Subsidies: The scheme subsidizes phones that are domestically assembled, supporting the industry’s growth.