Hike in import duties on components of mobile devices may nix PLI benefits

High component cost may push up mobile prices by 18%

The repeated increase in the import duties on key components of mobile devices may neutralise the benefits of the government’s ambitious and much-touted production-linked incentive scheme (PLI) for mobile phones.

The success of the PLI scheme is key to the government meeting its ambitious target of hitting $250 billion in the production value of electronics by 2025-26. Mobile devices are a large part of this plan, with the government aiming for a mobile phone manufacturing target of $110 billion by 2025-26 — nearly 3.7 times of what it has undertaken in 2020-21.    

However, research conducted by the India Cellular and Electronic Association (ICEA), and presented to the government before the Budget, shows that the average ex-factory cost of mobile phones has gone up by 5.72 per cent since 2020 and 2021 due to the increase in import duties. And that neutralises the 4-6 per cent (which on an average comes to 5-5.2 per cent) incentive on production value given to eligible players under the PLI scheme. The incentive under the PLI scheme was given primarily to reduce the cost disability of Indian manufacturers. For instance, they have a cost disability against countries like Vietnam and China (ranging between 10-12 per cent ) which is a key impediment to exports.

The ICEA report says that in 2020, import duty was raised on key components such as printed circuit board assembly (PCBA), comprising 45 per cent of the bill of material (BOM), display asse­mbly and camera module, among others.

In 2021, duties were raised once again — on over 13 components, including PCBA and camera modules, connectors, inputs and parts for the ringer and vibrator, display assem­bl­ies, mobile charger, and so on.

The hike in import duties has  consequences. First, the aspired 40-45 per cent value addition in mobile phones (from the current 15-20) will not take place. This is because domestic producers of sub-assemblies and components will quote a higher price — with their cost plus the high tariff. If there is no appreciable cost advantage, manufacturers of mobile devices may prefer to import the components.

Moreover, the impact of the tariff hike will be felt for long, creating an ecosystem which serves a fraction of the domestic market. Besides, the report says import tariffs focused on the domestic market do not provide scale by giving competitive access to global markets through exports. A modelling of input-output linkages shows that the tariff hikes of 2020-2021 are likely to reduce output and investment in mo­b­ile pho­n­es by 8 per cent, em­p­l­­oyment by 9 per cent, and exp­orts by 31 per cent vis-à-vis the results if such hikes had not taken pla­ce. Plus, prices of mo­b­ile phon­es will rise in the do­m­e­stic market by 18 per cent.

The report says there are ch­a­llenges for exporters as while they get refunds on duties it is onerus and expensive.

The report also points out that there are challenges for even those exporters who can get a refund of the duties. For example, for small exporters of battery chargers and parts, availing these duty benefits is onerous and expensive. Since tariffs create an especially difficult operational context for smaller producers, a simple and cost-effective solution would be to reduce tariffs on inputs to 0 per cent, or at best to 5 per cent, the report says.