GS Paper III

News Excerpt:

India faces challenges in becoming a smartphone export hub as it competes with China and Vietnam.

Smartphone manufacturing as a key pillar of economic growth:

• Smartphone manufacturing is a central pillar of the Indian Prime Minister’s ambitions to boost the economy and create jobs by attracting companies such as Apple, Foxconn, and Samsung to India, the world’s second-largest mobile market where production grew 16% year-on-year to $44 billion last year.
• That success as per the government is mostly due to financial incentives given to companies to produce more. 

Challenges to India's Smartphone Export Ambitions:

• Disparity in Export Percentages: The lower taxes in China and Vietnam helped boost their exports. Exports accounted for only 25% of India’s smartphone production in 2023, compared with 63% of China’s $270 billion worth of production and 95% of Vietnam’s $40 billion worth. 
•  Limited Tax Reductions on Components: The finance ministry lowered taxes on some components, including battery covers, to 10% from 15%, but did not agree to many other tariff cut requests. 
•  High Tariffs on Specific Components: India still imposes a 20% tax on parts including chargers, some circuit boards, and fully assembled phones.
• Vietnam and China on the other hand do not levy tariffs above 10% on components from their “most-favored nation” trading partners or nations with whom they have free-trade agreements. 
• Tariff Discrepancies: The lawmakers and lobby groups for Apple and other firms argue India’s high tariffs are a deterrent for companies de-risking their supply chains beyond China, and nations such as Vietnam, Thailand, and Mexico have raced ahead in phone exports by offering lower tariffs on components.
•  Elevated Production Costs: India has high production costs as we have one of the highest tariffs among the key manufacturing destinations.
• Supply chain limitations: Made in India phones use many parts made locally, but companies import many high-end parts from China and elsewhere due to supply chain limitations.
• These parts are then subject to the high tariffs the government has put in place to protect the local manufacturers, raising overall costs.

Steps taken by India to promote smartphone exports:

•  Production-Linked Incentive (PLI) Scheme: The government has launched the PLI scheme to provide financial incentives to smartphone manufacturers to boost local production and exports.
•  Phased Manufacturing Program (PMP): The PMP program promotes domestic value addition in mobile phones and their sub-assemblies/parts manufacturing.
•  The manufacturing of mobile phones is steadily moving from the semi-knocked down (SKD) to completely knocked down (CKD) level, progressively increasing the domestic value addition.
•  Foreign Direct Investment (FDI): The government has permitted 100% FDI under the automatic route for manufacturing electronic devices (excluding countries sharing land borders with India). This has helped attract foreign investment in the electronics manufacturing sector.
• Incentivized Areas for Export-Oriented Units: Special Economic Zones (SEZs) have been set up across the country to facilitate export-oriented manufacturing and trading. Units for manufacturing and related services set up under the Electronic Hardware Technology Park (EHTP) scheme are major contributors to India's electronics exports
• Design Linked Incentive (DLI) Scheme: The DLI scheme offers financial incentives and design infrastructure support across various stages of development and deployment of chipsets, systems & IP cores, and semiconductor-linked design. The scheme provides both a "Product Design Linked Incentive" and a "Deployment Linked Incentive".

Way forward:

• Tariff Reduction: The recent reduction in taxes on some components, including battery covers, is a step in the right direction, but more significant tariff cuts are deemed necessary to bolster India's position in the global smartphone export market.
•  Incentives and Subsidies: The government can offer additional financial incentives and subsidies to smartphone manufacturers to offset the impact of high tariffs on imported components.
• Trade Agreements: India should explore the possibility of entering into free trade agreements with key trading partners to lower tariffs on imported components.
•  Infrastructure Development: Investing in infrastructure, such as improved logistics and supply chain networks, can help reduce the overall costs of manufacturing in India.
• Skill Development: Focusing on skill development and training programs for the local workforce can help improve the overall efficiency and productivity of the manufacturing sector.