Smartphones have led the Make in India project which the government has been powering with huge subsidies and import duties. India exported more than Rs 85,000 crore mobile phones in 2022-23, according to the India Cellular and Electronics Association. Smartphone exports were only Rs 1,300 crore in 2017-18, which then moved up sharply to Rs 11,200 crore in 2018-19, and thereafter to Rs 27,200 crore in 2019-20.
The numbers were subdued in 2020-21 at Rs 23,000 crore due to Covid disruptions. The next year, in 2021-22, they almost doubled to more than Rs 42,000 crore. They again nearly doubled in 2022-23. Such a sharp and quick rise in smartphone exports is certainly due to the government’s efforts even though it also helps India that the world wants to shift supply chains away from China.
Smartphones are the flagship product of the ambitious Make in India project which had been fledgling to take off for many years. Behind the phenomenal growth of smartphone exports are subsidies and import duties. The first gives financial incentives to manufacturers; the latter protects them from cheaper imports.
India’s runway success with smartphone exports now faces a roadblock that threatens to derail it. The World Trade Organisation (WTO) has ruled against India imposing import duties on mobile phones and components. India plans to appeal against the ruling, but if it is made to remove the import duties, its first Make in India success story will meet an unhappy ending.
What has happened?
The WTO ruled on Monday that India has violated global trading rules in a dispute with the European Union, Japan and Taiwan over import duties on various electronics products including smartphones and its components. The WTO had set up dispute settlement panels to decide on New Delhi’s move to levy 10% customs duty on mobile phones and some other Information and communication technologies (ICT) products for the first time in July 2017 which increased to 15% that year. The duties were further raised to 20% despite opposition from a number of WTO members.The US, Turkey, the UK, Norway, Singapore, Thailand, Russia, Brazil, Korea, China, Canada and Indonesia were some of the third parties to the dispute, implying that they are neither the complainants nor respondents but have a substantial interest in the matter.What are India’s options?
The EU has suggested arbitration to India but India is likely to appeal the ruling. The decision itself can help India because the WTO’s appeals mechanism for such dispute resolution has been rendered dysfunctional by the US under President Donald Trump, which faced a tide of anti-protectionist appeals in WTO.
The US has opposed a proposal from 127 WTO members on more than 60 occasions to start the process of filling vacancies, thereby crippling the multilateral trade agency’s dispute settlement mechanism. The appeals panel, which is without judges now, usually takes nearly a year to settle an appeal. This means India can continue with import duties as long as the appeal is pending which is likely to be a long period. If India appeals, the case will sit in legal purgatory, says Reuters. What is India’s case?
India’s strongest defence of import duties is that mobile handsets were not among the list of electronic items it had signed up to eliminate tariffs in the 1996 Information Technology Agreement (ITA) at the WTO.
“India has argued that the HSN (the classification system) has evolved since 1996 (when the ITA was signed) and there have crept in some errors in the 2007 schedule, when transitioning from the 2002 schedule. Consequently, India’s stand is that certain products in respect of which commitment was not made have crept into the schedule and benefit could not be extended to these products,” Ranjeet Mahtani,Partner, Dhruva Advisors, a tax and regulatory services provider, told ET.
But the WTO has provisions for expanding the list contained in the 1996 ITA, according to an ET report. So, at best, this argument can be as good as a tactical defence.
What if India loses the appeal?
According to trade experts, if the appellate body also passes a ruling against India’s import duties, India will have to abide by that and make appropriate changes.
India is now an attractive destination for biggest smartphone makers such as Apple and Samsung and Chinese companies Oppo, Vivo and Xiaomi. The appeal is crucial for India as losing it will directly benefit China, from where India used to import most of the telecom equipment. Import duties offer up to 25% financial incentive for manufacturing within India. If they are removed, manufacturers could start importing components and mobile phones too.
By losing the appeal India will not only suffer a setback to its smartphone exports, but a flagship Make in India project grinding to a halt will impact India’s larger plans to become a manufacturing powerhouse by attracting global manufacturers. Losing the appeal will have another major impact. Domestic manufacturing not just boosts exports but also provides jobs to millions of people at a time when India needs to create more and more jobs for its predominantly young population.