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Surge in India’s mobile phone exports masks the full picture

The surge in India’s mobile phone exports masks the full picture, according to former RBI Governor Raghuram Rajan.

The sharp rise in exports has been accompanied by imports of inputs that go into making these devices, Rajan said in a LinkedIn post. “…and when we correct for that, it is very hard to maintain that net exports have gone up”.

In FY18, mobile phone imports amounted to about $3.6 billion, while exports stood at $334 million. By FY23, inbound shipments in the category fell to $1.6 billion, while exports rose to $11 billion, resulting in net exports of $9.8 billion, according to an analysis by Rahul Chauhan, Rohit Lamba, and Raghuram Rajan.

But the rise in mobile phone exports coincided with higher imports of inputs including semiconductors, printed circuit boards, displays, cameras, and batteries, the research note based on the analysis said.

The combined inbound shipments of these inputs reached $32.4 billion in FY23, making India a net importer of components worth $21.3 billion after adjusting for assembled phone exports worth $11 billion, according to Rajan.

India still imports much of what goes into the mobile phone, and when we correct for that, it very hard to maintain that net exports have gone up. A Research Note Co-Authored By Raghuram Rajan

The most likely explanation is that rather than importing finished phones as earlier, companies imported knocked-down kits because of government tariffs and production-linked incentives to assemble phones in India, a share of which was then exported, the note said.

The note concludes that “it is entirely possible”, that India has “become more dependent on imports during the PLI scheme” for mobile phones.

Starting in 2016, the government raised tariffs on imported mobile phone parts and, by April 2018, imposed a tariff of 20% on importing an entire mobile phone. In 2020, the government also introduced a PLI scheme to boost local production of mobile phones.

The scheme offers eligible companies an incentive ranging from 4% to 6% on the incremental sales over the base year—FY20 in most cases—of goods manufactured in India. This incentive is applicable for five years.

One key deficiency of the scheme is that the subsidy is paid only for finishing the phone in India, not on how much value is added by manufacturing in India. This matters! Raghuram Rajan

It turns out that very little value is added, apart from assembly in India, though manufacturers claim they intend to do more in the future, according to the research.

To be sure, the numbers represent the aggregate value of imports, the authors said. The import bill per phone might have seen a slight decline, but the increased dollar value of imports of inputs is driven by a dramatic surge in domestic demand, the note said.

The research note analysed other possible reasons for an increase in the import of inputs:

  • Inputs such as semiconductors are being imported for other electronics too, though “we see imports pick up only after domestic tariffs on mobile phone imports are raised”.
  • They explained that maybe imports of other electronic goods were also raised, causing imports of parts for those goods to also go up.
  • It’s possible that lithium-ion batteries, cameras, and battery chargers have other alternative uses, and higher imports might reflect an increase in demand for products such as lithium-ion batteries for electric vehicles.

Still, removing these sub-parts, too, shows no substantial difference in net exports—India remains a net importer, according to the authors.

As such, manufacturers are likely engaging only in assembly, which is a minuscule portion of the final value of the mobile phone, the authors said. So long as India does not make the component parts, the manufacturing value added in India will be small, they said.

A key question is whether the subsidy India pays on the finished mobile phone, along with state subsidies, actually outweighs the value added, they said. “This is something the government should look into before extending the scheme widely.” Bloomberg

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