Getting value addition in India takes time but AG’s plan to raise import duties will ruin this, trigger trade sanctions
Given the Attorney General’s reported opinion that the government can hike import duties on phones despite India being a signatory to the Information Technology Agreement (ITA is an umbrella agreement under the WTO), India could be in danger of inviting retaliatory trade sanctions without any attendant benefits in terms of an increase in genuine local production. That would be unfortunate considering that, while India’s local ‘manufacturing’ of mobile phones is increasing by leaps and bounds, it is only now that the glimmerings of a local value addition strategy are becoming visible.
That is why, even as local ‘manufacture’ has risen from 48 mn units in 2014 to a likely 223 mn this year, going by Counterpoint analysis, and imports of phones have fallen from 205 mn to a likely 47 mn, total imports have surged. While imports of finished phones fell from $7.4 bn to $2.6 bn, along with components, total imports have risen from $8.8 bn to $12.5 bn. Bragging rights are one thing, it is the local value addition that matters; decades after Apple started making phones in China where value addition is much higher, the bulk of profits still originate in the US.
It is unfair to blame the government for this as localisation takes decades—it took a little under two decades for Suzuki, to cite an example from India’s most successful localisation, to allow Maruti to do a full face-lift for the Zen, from the redesign to the clay models and creating the dies in-house. In the case of phones, being able to design the chips in India, which is where the really serious value addition is, can take decades. The strategy, in the meanwhile, was to slowly increase value addition with, in the first phase, manufacturing relatively simpler components like batteries and chargers in India—by doing this, the plan was to move from the 6% or so levels of value addition right now to around 32% by 2020.
The plan was as simple as it was elegant, and involved a differential countervailing duty (import duties are disallowed under ITA) on, initially, the finished phone and, over a period of time, on different components. All of this, however, suffered a setback since, under the GST, a countervailing duty (CVD) structure is no longer possible. While the most obvious solution was to refund the duties paid on locally-assembled phones, this ran into a roadblock with the finance ministry against this. The amount wasn’t much—if local value addition is to be $6.4 billion by 2020 going by the Counterpoint numbers, this would mean a duty refund of $1.2 billion, assuming an 18% GST rate. Though that isn’t much considering the benefits in terms of local value addition, creation of manufacturing capability and jobs, the finance ministry’s reluctance is understandable given other manufacturing will also want similar concessions.
Going by what the electronics secretary told The Economic Times, an alternative solution okayed by the Attorney General is that import duties be hiked on phones. Since that is prohibited by ITA, one explanation doing the rounds is that since there were no smart-phones at the time ITA was signed, it applied only to basic phones and not today’s smart-phones. That appears untenable since, over the years, the import classifications have changed to take this into account.
But even if the AG is right and India can get away by not attracting trade action from countries that produce mobile phones, this won’t achieve much. Assume India hikes import duties on finished phones by 11.5%, which is the amount of advantage the CVD system gives manufacturers today. In order to beat this, firms will start assembling phones in India in exactly the same manner that they do today. In other words, there will be zero value addition since the parts will continue to be imported.
In order to get a value-addition plan going, import duties will then have to be raised on components. So, for instance, it could be raised on batteries and chargers in a year or two. Even if the argument on ITA applying to dumb phones of yesteryear and not today’s smart-phones can be made to fly, no one can argue that yesterday’s chargers and batteries and mother boards are a dramatically new product.
If the government is serious about India becoming a big manufacturer, it needs to plan budgets for each department/ministry—the electronics ministry could pay for a GST refund from its budget. It sounds good to be able to say India will not give concessions, but they need to be given in areas where there is no obvious advantage to manufacturing in India; they also need to be given to negate existing disadvantages. In the apparel package stitched together last year, for instance, the chief economic advisor had estimated taxes equal to 5% of the total value of produce remained and needed to be refunded to put Indian exporters on an equal footing. In the case of the defence sector, similarly, Arun Jaitley is quoted as saying various concessions may need to be given to attract local manufacturing. What applies to one sector has to apply to another—what’s sauce for the goose…