The budget should not cut the import tariffs on parts used to make smartphones.

Currently, import tariffs on imported parts for smartphones in India are between 7.5% and 10%. The budget should maintain these taxes because: 1) the current tariff structure has already proven successful, 2) they support duty-free imports for making products to export, and 3) changing them could harm local manufacturing. This approach helps balance industry growth and long-term development in India's growing smartphone market.

1-Evident Success of current schemes/tariff structure: India's smartphone industry, with exports booming from $7.2 billion in 2022 to $13.9 billion in 2023, becomes the top performer for the PLI scheme by a wide margin. Over 98% of smartphones sold in India are made locally. This shows the success of deft policy interventions that include the PLI incentives that allows 4-6% cash incentive on annual incremental production and retaining a difference in tariffs of smartphone and its components.

2-Current scheme framework allows duty free input imports needed for export production

Indian manufacturers must pay duties on smartphones sold within India, but exports are exempt from such duties. Firms can import necessary inputs or capital goods duty-free for manufacturing and exporting electronic items. This is facilitated through schemes like Advance Authorisation, Export Promotion Capital Goods, and operating in Special Economic Zones (SEZs) or 100% Export Oriented Units. Additionally, firms can use the Customs bond scheme for duty-free imports without localisation requirements.

Big players like Apple, using facilities in Special Economic Zones, benefit greatly from this, exporting large volumes without paying import duties on components. Apple collaborates with contract manufacturers Foxconn and Wistron to make smartphones in India. Both Foxconn and Wistron are located in Special Economic Zone in India.

Foxconn has a large facility in Sriperumbudur, near Chennai, Tamil Nadu. The SEZ unit focuses on manufacturing, assembling, and exporting electronic products, including iPhones and other Apple devices. Wistron operates an SEZ unit in Narasapura, near Bengaluru, Karnataka. The unit primarily manufactures iPhones and other Apple products.

In 2023, Apple's iPhone production in India exceeded ₹1 lakh crore (about $13.5 billion), with ₹65,000 crore worth of these phones being exported. Apple can import all necessary inputs and machinery for manufacturing these export-oriented mobile phones duty-free.

3-Risk to Local Manufacturing: Removing tariffs might lead to a rise in superficial assembly plants that rely on imported parts and contribute little to the local economy. Such setups would likely vanish once government incentives end, harming deeper, more sustainable manufacturing efforts in India.

Imported components and subassemblies account for bill of material value of an India made smartphone upto 90%. Rising import bill of electronic components from $24.4 billion to $30.7 billion, a 25.5% growth suggests a high use of imported components in local manufacturing. With time, we expect that value additional will go up as more components are made locally. However, cutting import duties on component will kill any incentive for setting up of deep manufacturing operation in India. Firms will be happy to assemble a mobile phone from nearly ready imported kits. They will pack and go as soon as Government incentives disappear.

Few examples from the recent past:

One, making smartphones using tax arbitrage. During 2015-17, many firms started assembling smartphones from imported SKD kits. Tax arbitrage provided this opportunity. To promote manufacturing, the government announced a differential tax policy.

Import of components to manufacture phones attracted only one per cent Countervailing duty. But importing for sale attracted 12.5 per cent duty. The arbitrage disappeared with the introduction of GST in July 2017. All such firms disappeared simultaneously.

The annual loss to the government was Rs. 5,000 crore on the Rs. 40,000 crore domestic turnover. The ventures created low paying 40,000 more jobs. Each job cost over an annual Rs. 12 lakh to the government.

Two, export to get more incentives. Export of mobile phones multiplied eight times in a single year. From $200 million in 2017-18 to $1.6 billion in 2018-19. Reason: the government increased the cash incentive under the MEIS from 2 to 4 per cent. Industry sources say many firms rerouted the same mobile phones many times. The cost of routing was less than 0.3 per cent. The rest made products from ready-to-assemble kits imported from China. The difference in cost of components and finished goods is just 2-3 per cent.

In summary, maintaining current import tariffs is crucial for sustaining the growth and depth of India's smartphone manufacturing sector. Reducing these tariffs could encourage short-term assembly operations over long-term, valuable manufacturing, undermining the industry's success and future potential.

In conclusion, the decision to maintain the current import tariffs on smartphone components is more than a fiscal policy; it's a strategic move towards sustainable economic growth. The success story of 2023, where India's smartphone industry saw remarkable growth in both local production and exports, highlights the effectiveness of the existing tariff structure. Big players like Apple, leveraging Special Economic Zones, have exemplified the benefits of these policies, contributing significantly to the industry's success. However, reducing these tariffs could risk the emergence of transient assembly operations, potentially undermining the deeper, value-added manufacturing that is crucial for long-term industry health. It's clear that these tariffs are not just protective measures, but catalysts for fostering a robust, self-reliant smartphone manufacturing ecosystem in India, capable of competing on a global scale while driving local employment and technological advancement. Thus, preserving these tariffs is essential for continuing the remarkable growth trajectory and nurturing the deep manufacturing capabilities of India's smartphone sector.