More than 110 million phones being produced in the country in FY16 is a big deal when compared to the fact that the number was 60 million just a year before this. While this is a sign that the government’s Make-in-India scheme is catching on, with barely 6% of the total value of the phones —Rs 54,000 crore, according to a study by Ernst & Young—coming from local value addition, it will be many years before higher ‘production’ of phones in India will mean a reduction in the import bill even though the number of plants ‘producing’ phones is up to 40, from a mere three in 2014. One of the reasons for the ballooning import bill for electronic products is, in fact, due to the demand for mobile phones.
Genuine manufacture, as opposed to assembly of imported components, is a time-consuming task, which is why the government had come out with a phased plan for value addition. While the government had been tweaking the incentive structure for several years, the big break came when the budget for FY16 raised the countervailing duty (CVD) to 12.5% if a phone was being imported but would be just 1% if ‘produced’ locally.
Over a period of time, the phased manufacturing programme (PMP) was to bring a similar differential duty regime for various components. So, in the current phase, chargers/batteries/earphones are to get an 11.5% CVD advantage if they are produced in India as opposed to the current practice of importing them and just assembling them; over a period of time, this PMP would be extended to other components and, as per the plan, around a third of the value addition will be done in India by 2020.
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With GST coming in by July, or even September, however, the differential CVD route will no longer be available. While one suggestion doing the rounds was to increase import duties on phones and components, this is not possible under the Information Technology Agreement that India signed in 1997 under the aegis of the WTO. Another suggestion, made by Ernst & Young, is that the GST paid by a manufacturer be refunded based on the level of indigenisation—its calculations show the net advantage will remain the same for genuine manufacture in India and so will spur value addition. While it is possible there are other solutions, it is incumbent upon the government to inform phone manufacturers of what incentives it will be offering.
If not, it must be prepared for the manufacturing in India to stop almost as suddenly as it accelerated—whether or not Apple is justified in asking for the concessions it has, certainly its demand that the duty-regime remain unchanged for a certain period of time looks reasonable.