Customs duty cut on mobiles welcome, but not enough to meet $110 bn export target

The Union Budget 2024-25's reduction of the basic customs duty (BCD) on mobile phones and components from 20% to 15% is being touted as a move to boost the domestic mobile manufacturing industry and exports. However, this measure may fall short of achieving the ambitious target set forth in the National Policy on Electronics 2019, that aims for India to achieve exports of 600 million mobile phones worth $110 billion by 2025. With barely a year left to hit this goal, the progress made so far indicates that this target remains elusive.

India’s smartphone exports have averaged $6.48 billion annually from FY19 to FY24, with cumulative exports amounting to $38.9 billion, significantly short of the $110 billion target. Despite the substantial 42% growth in smartphone exports to $15.6 billion in FY24, largely driven by the Production Linked Incentive (PLI) scheme benefiting companies such as Apple and Foxconn, the cumulative progress remains inadequate.

Navkendar Singh, associate vice-president at IDC India, points out that while the reduction was a response to industry lobbying, it might not suffice to meet the ambitious export goals. "The industry has been lobbying for the reduction... It's sort of de-incentivised to produce when you bring components here while you are inviting and trying to do PLI and other schemes, but then you have a duty of 18%," says Singh.

The finance minister had mentioned the three-fold rise in domestic production of mobile phones and around 100-fold growth in export of mobile phones in the last six years as the reason for reducing BCD on mobile phone and components from 20% to 15%. “With a three-fold increase in domestic production and almost 100-fold jump in exports of mobile phones over the last six years, the Indian mobile industry has matured. In the interest of consumers. I now propose to reduce the BCD (Basic Customs Duty) on mobile phone, mobile PCBA and mobile charger to 15%,” Nirmala Sitharaman said during the speech.

Singh, however, believes duties are only one part of the larger ecosystem required to boost manufacturing and exports. "If you want to be China plus one, China has 350,000 ISO 9001 companies, whereas India has 35,000-40,000 companies. So the larger play of infrastructure, logistics, and so on are also important, apart from just duties," he explains.

Furthermore, Singh notes the cut in customs duty might not translate into lower prices for consumers. "Don't expect brands to pass the cost benefit to the consumer. They will not do that, including Apple. They will possibly invest in infrastructure, their own sales, and possibly exports will help," he stated. This sentiment contradicts Sitharaman’s assertion that the duty reduction would benefit consumers by reducing the overall price of smartphones.

India’s mobile manufacturing sector has grown significantly, with substantial contributions from companies like Apple, which began manufacturing iPhones in India in 2017. However, the sector continues to face challenges such as high tariffs on components, which hinder further growth. The United States emerged as the top destination for Indian smartphone exports in FY24, with shipments valued at $5.6 billion. Despite this success, the overall export figures indicate that the $110 billion target remains out of reach.

Industry experts argue that a more comprehensive approach is needed to achieve these ambitious goals. Singh highlighted that the current ecosystem in India is not sufficient to support large-scale manufacturing and exports. "When you talk about that ecosystem, it's a 20 to 30-year plan. Chipset plants cannot come here for a 5-10 year plan. For a fab, you need water and silicon, silica," he said.

The issue of value addition also remains critical. As Singh explains, "We are anyway adding not more than 5-7% of the total value addition. We don't produce displays. We don't produce chips. We bring the parts, then assemble them here." This minimal value addition underscores the need for a more integrated manufacturing ecosystem.

More importantly, from a domestic perspective, there is a pressing need for lower-priced 5G handsets to expand the technology's adoption in India"The need of the hour is 5G devices below Rs 8,000, below $100. There's a large base sitting there on 4G." Lowering the cost of 5G devices could significantly boost the adoption rate and bridge the digital divide.

As for the $110 billion target, India should pursue a more holistic approach, addressing infrastructure, logistics, and a conducive business environment. As Singh aptly puts it: "While the government is working in the right direction, the China plus one strategy is slightly exaggerated in the short term."