High tariffs weaken industry, nullify PLI impact; ICEA calls for tariff rationalisation in Budget

India Cellular & Electronics Association (ICEA) has made a case for reduction in input tariffs on smartphone components in the forthcoming Budget to be unveiled later this month.

The India Cellular & Electronics Association (ICEA) said higher input tariffs perpetrate import dependency and "restrict" the potential impact of PLI.

ICEA outlined three major recommendations: rationalise tariffs on mobile phone parts and sub-assemblies, policy and financial support to develop a largescale ecosystem, and establish global-scale factories and warehousing to ensure timely delivery.

"Higher tariffs make India incompetent beyond import substitution, and creates a viscious cycle of high prices by domestic suppliers, and global suppliers, including those operating in India," ICEA said.

High tariffs also significantly lower the tendency of global firms to shift production to India, it said.

"Building local supply chains is a slow process due to lack of technology, high cost of finance, and skill gap, and importing inputs involves a high tariff, so what we were intending to do with PLI, because of these restrictions, it is not growing as expected," ICEA Chairman Pankaj Mohindroo said.

Tariffs on smartphones have been successful, and have built a USD 51 billion industry, but it has not worked the same way for inputs, ICEA said, adding that working and focusing on aggregate value addition is the need of the hour.

"Domestic supply chain can only be built with scale and from orders placed by global value chains (GVCs). GVCs choose the most competitive countries, not companies. Tariffs are unhelpful," it said.

ICEA based its recommendations on a "Tariff Study" it conducted across seven competing economies, including India, wherein China and Vietnam are the main competing economies for India in the global mobile phone market.

"India's tariffs on inputs are much higher than its competing economies, and these high tariffs lead to higher costs for finished goods," the report said.

"High tariffs on inputs increase costs, making Indian industry less competitive, and hindering its ability to join GVCs. This discourages GVCs from shifting to India. Competitiveness is critical to building scale and attracting FDI which in turn, positively impacts domestic value addition and job creation," ICEA said.

High input tariffs in India make suppliers in Vietnam and China stronger, increase disability, diminish PLI impact and make domestic industry weaker, the report said.

ICEA said India's complex seven tariff slabs for the mobile sector should be reduced to 3+1 slabs -- 0 per cent, 5 per cent, 10 per cent, and 15 per cent.

"A high tariff on sub-assemblies and components of sub-assemblies thereof increases the costs of these sub-assemblies, thus making them less competitive than their competitors. This in turn decreases the competitiveness of smartphones produced in India," it said.

The study said any revenue foregone under this tariff reduction would be more than compensated by the additional revenue generated from higher affordability, increased production, sales of smartphones, and higher economic activity following job creation.

To attract GVCs and increase the scale of production, ICEA said all tariff lines that increase costs significantly, including components of complex subassemblies, should be brought down to zero.

It also suggested the removal of 2.5 per cent tariff on sub-assembly parts and inputs.

The industry body further said the government should provide appropriate policy and financial support for building large-scale components and sub-assembly ecosystems, with a longer gestation and incentive period."This will offer long-term policy predictability and certainty, creating an environment for business continuity. It will further enable creation of jobs, foster advanced skills, integrate into the electronics GVCs, achieve scale, increase exports, and enhance value addition," it said.

India's electronics manufacturing output touched USD 115 billion in FY24, with USD 29.1 billion in electronics exports, making electronics the fifth-largest export category from India. Mobile phones alone contributed over 54 per cent of this export with a production of USD 51 billion in FY24.

"Through a focused policy, financial support, globally competitive tax regimes, and by fostering advanced skills, India can become a leader in the global electronics industry," Mohindroo said.

To build a sustainable and robust large-scale electronics manufacturing, it is imperative to build the components and sub-assembly ecosystem, ICEA added.