By Anwarul Hoda & Neha Gupta

In recent decades, manufacturing industries around the world have been riding the wave of international production networks to achieve an unprecedented expansion in production and trade worldwide. These networks, also known as global value chains, have sprung from production—sharing arrangements across international borders among units producing goods and services. The phenomenon has been facilitated by three interrelated developments in world trade and production of goods—coordinated action by governments to eliminate and reduce tariff and non-tariff barriers to trade in goods, technological developments resulting in a steep reduction in the time taken for transportation of goods and advances in communications that made it possible to monitor and control production taking place in diverse geographical regions from one location. 

The rise of the Indian mobile phone industry

Although India was largely untouched by the global value chain revolution and overall, remained a laggard in manufacturing among emerging economies, the government decided to seize the moment and spark up the electronics industry in the country, particularly the mobile phone industry. It enhanced tariff protection for the product through the phased manufacturing programme and put in place an ambitious production-linked incentives (PLI) scheme, providing a subsidy of 4-6% on incremental sale. These initiatives clicked with a strong rise in the demand for mobile phones, both in India and abroad, to give a boost to the industry. 

A number of external factors added further impetus. The Covid-19 pandemic caused unease among investors in China about the implications of a geographical concentration of the global value chains. Trade wars involving the US and China exacerbated fears that geopolitical tension would cause disruption in global value chains. All this led to the ideas of friend-shoring and nearshoring and of China+1, and India emerged as one of the alternative destinations for all manufacturing industries. But on account of the roaring demand and the relative ease of manufacture through assembly, the momentum converged on the smartphone industry, which recorded a truly remarkable performance. 

The primary aim of the industry was to benefit from globalisation and maximise production, attracting foreign direct investment, and providing employment opportunities at the same time. It clocked an increase in the value of production from $3 billion to $50 billion during 2015-2025. From a rank of 34 in 2015, India advanced to the fourth position among smartphone exporting countries and territories, placed after China, Hong Kong (China) and Vietnam. In the prized US market, the exports of iPhones from India jumped to 2.9 million units in April alone.

The challenge of low domestic value addition

Even as the impressive rise in the volume of production took the Indian mobile phones industry near the top ranks in the world, the quality of its performance was found lacking. Raghuram Rajan, the former Governor of the Reserve Bank of India, was the first to call out on the flaws. In 2023, he drew attention to the fact that the Indian mobile phone industry was importing much of the parts, components, sub-assemblies, and modules; and undertaking only assembly operation that constituted only a tiny proportion of value addition. The general expectation was that as the Indian economy rolled forward and the industry matured, there would be progressive accretion in the domestic value added for the mobile phones produced in the country, but this has not materialised.

A 2024 report on the Indian electronics industry by the Niti Aayog shows that the position remains virtually unchanged. Normally, the value chain for the manufacture of mobile phones should begin with design and prototype, followed by component making, and end up with assembly. The Niti Aayog report reveals further that in the Indian mobile phone industry, there is a void in a large segment of the value chain. Design and prototype capabilities are missing altogether. The component industry is also virtually non-existent. Dependence on imports for a large proportion of high-tech components constrains assembly operations as well. Despite significant strengths in assembly, the Indian mobile phone industry has been able to localise sub-assemblies only in the two minor areas of battery packs and chargers. In about a dozen other sub-assemblies, including displays and camera modules, localisation has remained pegged at below 25%, due mainly to dependence on imported components. 

Higher tariff protection proves counterproductive 

The government has been pursuing the policy of imposing or increasing tariffs on components and sub-assemblies in the hope that additional protection would foster localisation. This has not been fulfilled mainly because the local demand for components or sub-assemblies is not large enough to enable manufacturing to be undertaken on an internationally competitive scale. 

Instead of incentivising localisation, tariffs on inputs have become a hindrance for the integration of our mobile phone industry into the global supply chain. Calculations made in the industry show that the free trade agreement weighted tariff in India for the 68 HS 8-digit tariff lines of parts and components of mobile phones is 6.2% against 0.7% for Vietnam, and 4% for China. The system of production in bonded zones for exports, which allows duty free treatment of imported inputs, gives further advantage to China. 

More domestic value addition

The Niti Aayog has identified component manufacturing as the weak link in the chain and recommended steps that need to be taken to stimulate component making. In fact, the government has been fleet-footed in addressing the deficiency and, on April 8, the ministry of electronics and information technology has already issued the strengthened scheme of incentives for identified sub-assemblies and bare components as well as for capital goods used for their manufacture. If the government’s incentives are successful, a big gap in the mobile phone value chain would be removed. 

We would observe that with respect to tariffs, the government needs to do more than just simplify the structure, as recommended by the Niti Aayog. As the higher prevailing tariff in India is affecting its international competitiveness in mobile phones, decisive action is needed to reduce the tariff level on parts and components of mobile phones, say to the simple average level prevailing in competing countries such as the Association of Southeast Asian Nations.

The writers are respectively honorary professor, ICRIER and international trade economist.

Disclaimer: Views expressed are personal and do not reflect the official position or policy of FinancialExpress.com. Reproducing this content without permission is prohibited.