Mobile PLI: Only the long-game matters

Rather than solely focusing on boosting exports, India should aim to become a global supplier of key components

The mobile phone sector has witnessed remarkable growth under the production-linked incentive (PLI) scheme, with one in four phones produced being exported, and the export value nearly doubling from $7.2 billion in 2022 to almost $14 billion in 2023.

To bolster this growth, the government recently reduced import tariffs on specific mobile phone components from 15 per cent to 10 per cent, just before the Budget announcement. In this context, we’ll explore the implications of these tariff cuts, the current state of India’s mobile phone industry, past challenges, and potential growth scenarios.

The recent tariff cuts are expected to decrease the prices of domestically sold mobile phones, but they won’t improve export performance as major firms are located in special economic zones (SEZs) where all imports are duty-free if used to make export products. Apple, for example, makes mobile phones in India through its partners Foxconn and Wistron, both located in SEZs.

The tariff cuts cover many low-end parts, such as battery covers and lenses, for which a Phased Manufacturing Programme with a 15 per cent tariff was already in place to promote local production. This may be affected in a few cases.

The recent growth in the mobile phone sector in India can be attributed to three government decisions: (i) a 20 per cent import tax on mobile phones to discourage import of finished product, (ii) lower import taxes (0-10 per cent) on components to create a tax arbitrage for local production, and (iii) a cash PLI incentive of 4-6 per cent based on incremental production. India’s large and growing domestic market provided an additional attraction.

While the combination of tax incentives and a large market attracted large firms, the latest data highlights a weak link between their investment and production. Up to December 2023, mobile phone makers have produced phones valued at Rs 4.12 trillion with an investment of only Rs 7,400 crore. This means every rupee invested generated Rs 55 in production. The number may reach Rs 100 by the end of the PLI scheme. In a few cases, the PLI incentives may exceed the total investments. The problem with low investment is that it leads to superficial assembly of imported inputs. Worse, many manufacturers stop production once the incentives are withdrawn.

Another problem with the current production set up is the heavy dependence on the import of high-end components. Unless India begins local production of these parts, its mobile phone industry may continue to rely solely on incentives, lacking a stable foundation.

Achieving this is not impossible. In fact, it has been done before, as demonstrated by the Nokia story.

Nokia, a Finnish company, began manufacturing mobile phones in India from Nokia SEZ in Sriperumbudur, Tamil Nadu, in 2006. It co-located key component suppliers instead of relying on imports for every component. The strategy paid off, resulting in higher production and exports. Between 2010 and 2013, exports reached over $2 billion. Notably, Nokia succeeded when India had no import tariffs on mobile phones, unlike the current 20 per cent rate, highlighting Nokia India’s ability to compete globally. Now comes the tragic part.

Nokia India faced labour union issues and accusations from the state sales tax department, which claimed that Nokia evaded Rs 2,400 crore in taxes by falsely labelling domestic sales as exports. Nokia defended itself with evidence of exports and eventually received relief from the Madras High Court. However, a new tax dispute emerged when the income-tax department demanded Rs 15,000 crore, arguing that Nokia incorrectly accounted for software purchases from its parent company in Finland. This conflict, based on different interpretations of the Finland-India tax treaty, resulted in Nokia's assets being frozen. These tax issues eventually led to the closure of the Nokia plant in 2013.

The closure had significant consequences. India’s yearly mobile phone exports plummeted from $2 billion to $200 million, and around 17,000 employees lost their jobs. Consequently, India resumed relying heavily on China for mobile phone imports.

While the closure of Nokia plant may have been caused by overly aggressive actions from a few individuals, it ultimately damaged India’s reputation as a reliable investment destination. The Nokia era represents India’s first successful venture in the mobile phone industry.

Let us now explore three potential growth trajectories for the industry.

1. The current phase continues with the government extending the PLI scheme and further reducing import duties on certain parts. The country would continue to mainly assemble products with minimal local production and be happy with high production and export data.

2. Disruption happens. Industry disruption could occur for several reasons. Major companies might halt production and relocate to countries with more attractive incentives, or China might cease supplying essential components. Additionally, India might have to comply with a World Trade Organization (WTO) ruling reducing mobile phone tariffs from 20 per cent to zero. India has already lost the initial ruling at the WTO. The government may discontinue incentives like PLI after the stipulated period.

The Indian mobile industry has faced disruptions in the past—first time in 2017, when tax arbitrage ended with the introduction of goods and services tax, and then again in 2020 when the Merchandise Exports from India Scheme (MEIS) incentives ceased. Companies like Micromax, Intex, Lava, Karbon, and many others, following a low-investment, high-import, and high-production model, disappeared during these periods.

3. Local component ecosystem develops. This would be the most desirable outcome for long-term growth. India would need to back companies committed to expanding localisation within a time frame, like Nokia did from the beginning. This will require offering incentives to firms for making significant components. Countries like Korea, Japan, Vietnam, Taiwan, and the US are examples where they specialise in producing specific high-value components like displays, memory, connectors, and semiconductor chips and avoid low-value assembly jobs. India could aim to become a global supplier of a select few components.

India’s aspirational yet attainable goal is to develop mobile phones for the bottom four billion people. While many companies often release new and updated models, there’s a significant demand for simple, reliable mobile phones with long battery life and a five-year warranty. These devices could utilise 27-nanometer chips, which India could import or produce domestically along with most other parts. India has the potential, skills, and resources to develop, make, and distribute this type of phone worldwide.
 

The writer is founder, Global Trade Research Initiative