India’s IT ministry concerned about falling behind China and Vietnam in smartphone exports

According to government documents seen by Reuters, the deputy IT minister has warned that India could potentially lose its position as a significant smartphone export hub to China and Vietnam. To attract global companies, India must swiftly take action by offering lower tariffs.

Smartphone manufacturing is a key part of Prime Minister Narendra Modi’s ambitions to boost the economy and create jobs by luring the likes of Apple, Foxconn and Samsung to India, the world’s second-largest mobile market, where production grew 16% year-on-year. $44 billion last year.

This success, the Modi government says, is mostly due to financial incentives given to companies to produce more. But lawmakers and lobbying groups for Apple and other companies argue that India’s high tariffs are a deterrent to companies de-risking their supply chains outside of China, and countries such as Vietnam, Thailand and Mexico have made strides in phone exports by offering lower tariffs on components.

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A confidential presentation prepared by India’s deputy IT minister Rajeev Chandrasekhar and sent to the finance minister on January 3 shows his ministry’s concern about losing out due to uncompetitive tariffs.

“India has high production costs due to the highest tariffs on key manufacturing sites,” Chandrasekhar wrote in documents seen by Reuters.

“The geopolitical realignment is forcing supply chains to shift away from China… We must act now or they will shift to Vietnam, Mexico and Thailand.”

Chandrasekhar and India’s IT ministry did not respond to Reuters’ requests for comment.

Lower tariffs on components are key to India’s efforts to attract smartphone makers.

“Made in India” phones use many locally manufactured parts, but companies import many high-quality parts from China and elsewhere due to supply chain constraints. These parts are subject to high tariffs imposed by the government to protect local manufacturers, which increases the overall cost.

US Ambassador Eric Garcetti recently said that foreign investment is not flowing into India as fast as it should be, instead going to countries like Vietnam because of tariffs. “If you tax inputs … you’re not protecting the market. What you’re doing is restricting the market,” he said.

Chandrasekhar noted in his papers how lower taxes in China and Vietnam helped boost exports. Exports accounted for only 25% of India’s smartphone output last year, compared to 63% of China’s $270 billion output and 95% of Vietnam’s $40 billion output, he said.

“MATCH CHINA, BEAT VIETNAM”

India aims to account for 25 percent of global electronics production by 2029, but official documents showed its share currently stands at just 4 percent, although Apple, Foxconn and Xiaomi had all increased output recently.

Chandrasekhar’s documents were shown to India’s Finance Minister Nirmala Sitharaman last month to lobby for lower tariffs in the annual budget. The Finance Ministry reduced taxes on some components, including battery covers, from 15 percent to 10 percent, but rejected many other requests for tariff cuts.

The Finance Ministry and Sitharaman’s office did not respond to requests for comment.

India still imposes a 20 percent tax on parts, including chargers, some circuit boards and fully assembled phones. The IT minister wanted taxes to be reduced to 15 percent this year.

Chandrasekhar also claimed that Vietnam and China do not levy 10 percent tariffs on components sourced from “most favored nation” trading partners or countries with which they have free trade agreements. India is not doing that and is imposing “high” tariffs on many components, he said.

“We need to get into China and beat Vietnam on tariffs to attract” global supply chains, Chandrasekhar wrote. “No country with high tariffs can attract” them.

SATURATING THE LOCAL MARKET, EXPORTS FIXED

Last week, Xiaomi privately asked New Delhi to lower tariffs on more components used in cameras and USB cables, saying it would help “align with rival manufacturing economies like China and Vietnam.”

While growing local demand has helped keep the local manufacturing industry profitable, Chandrasekhar said in the letter that this “domestic market for smartphones is soon to be saturated” and because users are not switching phones as often.

India’s goal of increasing mobile phone production to more than $100 billion a year – and 50 percent of that will be exported – requires a new strategy, the minister said.

“Tariffs are becoming an obstacle,” the minister said in his presentation. “We have to change the tariff policy to suit our new goals. Export, not domestic.”