How increased import duties on electronics/hardware sub-sector will only increase smartphone prices.

The vision of Digital India programme has been to transform India into a digitally empowered society and a knowledge economy. One of the reasons for the widespread reach of the Digital India programme to every nook and corner of the country has been the availability of smartphones. Average selling price of smartphones has dropped continuously since 2012, with new phones available at a price as low as `4,000. More than 75% of the Indian population uses mobile phones in India, and is the second largest mobile phone consumer. However, of this, only approximately 20% are smartphone users, even though prices of smartphones, compared to international peers, are significantly cheaper. Smartphone penetration was expected to significantly increase on the back of competitive prices offered by many phone manufacturers. This could have particularly helped rural India, especially in the context of a recent report that mentions how in rural India mobile penetration is much higher than television. For most developing countries, smartphones have presented themselves as a simple answer to digital inclusion. The vision for Digital India would have reached its desired conclusion but for the recent handicap introduced in the form of increasing duties on electronics/hardware sub-sector. Low prices of smartphones were also a result of policy. Since tax on imported phones was very high, and tax on imported components was very low, many foreign manufacturers were encouraged to assemble the components in their factories in the country. There has been a debate around whether this move has resulted in the dumping of low-cost smartphones in India by the Chinese vendors. 

While this apprehension may have resulted in the increase in the customs duty for the sub-sector, this will only increase smartphone prices, and affect the expanding reach of Digital India. The argument given while imposing higher customs duty was of protecting the domestic industry. Understandably, policymakers have been quick to point out that this is a temporary window of opportunity given to these sub-sectors to firm up their game. It must be added that what has been done is well within the ambit of WTO rules. Notwithstanding these justifications, the market will view this recent change in the duty regime as a change in policy stance from an open economy to a more restricted one. History is replete with examples on the baneful effects of a protectionist regime. It is well known that by supplying products at lower prices, trade increases the gains of the poor more through an increase in real income. The case of electronics/hardware, where, till very recently, many sub-sectors enjoyed zero import tariffs is particularly interesting. There are 17 sub-sectors in electronics/hardware that imported goods worth more than $100 million in FY17; 

Imports of parts of telephone apparatus reached an astounding $6.2 billion in FY17. Due to the large-scale imports in the electronics sector, the wholesale price index (WPI) for computer, electronics and optical products has been persistently below WPI for manufactured products for these many years, which clearly implies that imports have helped reduce the sectoral price level. For example, in FY13, the former was at 101, with the latter at 105.3. WPI for electronics at 108 came close to WPI for manufacturing products at 109.2 in FY16. After FY16, the rate of increase in WPI electronics was much slower than that for WPI for manufacturing products; as a result, WPI electronics for the first 10 months of FY18 stood at 110.1, compared to 113.3 for the latter. Lower import duties, thus, is one of the reasons behind the impressive penetration of mobiles/smartphones/electronic devices. Thus, it can be argued that opening up of the sector to imports has kept the price level below the average general price level. Lower prices have made electronic items more affordable, which has the capacity to positively affect the Digital India initiative by addressing the most persistent problem of affordability. 

Economic literature is clear—even if the aim of protectionism is to improve industrial efficiency and competitiveness, it comes at a substantial cost to civil society. For example, the Consumer Price Index (CPI) for the clothing and footwear sector, which has significant tariff protection of at least 10%, has always matched or overshot the overall CPI (urban and rural) for the years FY13 to FY17. Both the CPIs matched in FY13 and FY14, after which CPI for clothing increased at faster pace to reach 133.9 in FY17, compared to CPI combined which was at 130.3. If the sector was gaining in productivity, compared to the overall economy, then this would have manifest itself in the form of a slower increase in price level, compared to the increase in overall CPI. Since this has not been the case, one can argue that, despite protection, this sector has not been able to lift its productivity and efficiency, as a result of which consumers have not benefitted from lower prices. 

Manufacturers or assemblers operate on wafer-thin margins at the lower end of the mobile market, and any increase in customs tariffs will be passed on; consumers will, thus, have to cough up higher prices for smartphones. Higher cost will affect the pace of mobile penetration in rural areas, and, hence, has the potential to slow down efforts in reducing the digital divide. Given the time taken for creating an ecosystem of higher productivity, has the government sacrificed its digital inclusion efforts in the hope of spurring growth in the manufacturing sector? 

Source: financialexpress.com