Budget 2013: Why the mobile duty hike is not so bad

Finance Minister P. Chidambaram presented the union budget for 2013 yesterday to lukewarm reception. One of the main aspects of the budget that received negative attention was the decision to increase the import duties on phones costing more than Rs. 2,000 from 1% to 6%. This will undoubtedly directly affect prices of mobile phones since a significant share of the handsets sold in India are imported from countries like China, Taiwan and South Korea.

The Finance Minister explained that the decision to hike the import duties on mobile phones was made to encourage indigenous manufacturing but financial and technology analysts have claimed that that is just one of many reasons for the hike. While speaking to Bloomberg, Anshul Gupta, an analyst with Gartner said that the hike was just another example of the government targeting a successful industry to raise revenues. This appears to be a valid reason since the Finance Ministry has also revealed that the Fiscal Deficit in 2012-13 for India is expected to be about 5.1% of the GDP, making it around Rs. 5,10,000 crores.

That hasn’t stopped the budget from being widely panned by industry experts and analysts. Rajan Bharti Mittal, vice-chairman and managing director of Bharti Airtel, called the hike “over the top” and said that it should be reviewed since most mobile phones couldn’t be considered luxury items. Sunil Dutt, MD of BlackBerry India, also shared Mittal’s viewpoint and said that because of the hike, the smartphone segment in the country would see a slow growth. Mohammed Chawdhury of PricewaterhouseCoopers has claimed that the hike in import duties will result in less demand for mobile phones from consumers and could also lead to a drop in people using data services.

Why it’s not all bad

Okay, even though Chidambaram made a commendable effort to be branded “Spoilsport of the Year” especially for fans of all things mobile, the budget actually sounds worse than it actually is and can even be applauded for certain things.

This is why the budget does not mean the end of the world:

Local manufacturing is a good idea

Lost amidst the shrill (and obviously biased) complaints from phone manufacturers is the original focus of the budget, especially when it comes to the hike in import duties on mobile phones. If you actually analyse the budget, you will notice that it does actually take steps to increase local manufacturing. The budget includes a complete waiver on import duties on machinery that can be used to locally manufacture chips. This means that companies like Samsung, Intel or even Transcend will be incentivised to set up chip fabrication units in India. This could result in other ancillary industries associated with manufacturing mobile phone finding it easier to set-up house in India. We reali e that all of this is heavily dependant on many other factors as well (including common complaints against bureaucracy, lack of infrastructure) but it does seem like a step in the right direction.

Of course, local manufacturing also means that it would help employment numbers. A report by The Economic Times claims that if 50% of all demand for electronics were met by local manufacturing, it would result in at least 2 lakh more jobs. And whether you agree with the hike or not, you’ll agree that that is a target worth achieving.

There’s a tax cut waiting in the wings

Chidambaram may want to increase import duties on mobile phones but Kapil Sibal, the Union Telecom Minister wants to actually slash taxes on mobile phones. Sibal recently wrote a letter to a committee of state finance ministers asking that mobile phones be given a status as goods of special importance under the Central Sales Tax Act, which would result in taxes on phones being slashed by up to 8%. Considering the fact that tax makes up a substantial share of mobile phone prices, this would result in phones become cheaper. The tax cut would also offset any increase in mobile prices engendered by the hike in import duties.

We should point out that this tax cut hasn’t yet been implemented and so far, only exists as a policy recommendation.

It may not affect prices after all

The one-note warning that most mobile phone manufacturers marched out after the budget was presented was that the import duty hike would result in phones becoming more expensive. However, there may actually be nothing worth worrying over because it’s highly likely that there won’t be changes when it comes to mobile prices. While speaking to Bloomberg, T.M. Ramakrishnan, the CEO for devices, Spice said that although he didn’t agree with the import duty hike, he didn’t foresee a fall in demand from consumers, rather just a drop in margins for manufacturers.

Now, it’s pretty common knowledge that by operating on ra or thin margins, Indian mobile companies such as Micromax and Karbonn have occupied an impressive market share especially in the mid-range and budget segments. This ensures that in order to compete with these manufacturers, companies that operate on higher margins such as Nokia, Samsung and LG will, in most likelihood, not risk raising prices and driving more consumers away.

Even in the worst case scenario, if smartphone prices do rise, it’s worth noting that about 75% of mobile phone users in India own phones that cost less than Rs. 2,000. So, quite honestly, in spite of all the pessimism that the budget has engendered, we really don’t think it will lead to massive changes in the way we buy phones in India.

Budget 2013: Why the mobile duty hike is not so bad