India’s Import Tariffs in Electronics Sector Higher Than China and Vietnam: ICEA Study

India’s premier electronics association ICEA, in collaboration with IKDHVAJ Advisers LLP, released a detailed comparative study of 120 tariff lines of electronics priority products in India vis-à-vis four key competing investment destinations – China, Vietnam, Thailand, and Mexico. These imports constitute 80% of the cost of mobile phones – India’s largest produce out of the US $75 bn electronics sector. 

Key Findings:

The comparative study highlights that while India has zero tariffs on 32 of the 120 tariff lines, others have more zero tariffs, ranging from 53 (China) to 74 lines (Mexico). For non-zero tariffs, India’s tariffs are higher for 85% (Thailand, Vietnam) to 95% (China) of these tariff lines. Vietnam’s effective tariffs are lower also because of its FTAs with major suppliers of inputs. The trend: India has the largest tariff lines for the selected products, with tariffs in 2020 being higher than in 2014.  

India’s higher tariffs are even more evident for the priority products identified by the industry. For finished products, India’s tariffs are slightly lower for only one tariff line of China. However, there is no tariff line for inputs (components and sub-assemblies) for which India’s import duty is lower than the competing economies, showing relatively higher production costs in India than the four economies. 

Impact of High Tariffs:

The study shows that higher tariffs negate the support provided through PLI Schemes. Further, levying tariffs for revenue is counterproductive because of GST losses due to lower output and imports. Additionally, India's higher tariffs increase production costs due to costlier imports and the lack of adequate domestic products available to substitute the more expensive imports – adversely affecting both exports and the ability to link up with GVCs competitively. Additionally, higher tariffs affect sectors like automotive products and medical devices, to which electronics are significant inputs. 

"A US $ 300 billion manufacturing target by 2026 requires stability and prior consultation before finalizing tariffs. Tariffs go to the core of competitiveness and scale. For Union Budget 2022-23, we request the government to review all tariffs on inputs for PLI schemes and reduce tariffs in areas where there is no local capacity", said Mr. Pankaj Mohindroo, Chairman ICEA.    

Recommendations:

The study concludes that for India to integrate into global supply chains, its tariffs on inputs should at least match or be less than its competitors. Consideration of tariff increases should only be in cases with a large domestic capacity or a clear roadmap with specific, well-identified vendors who can produce components for manufacturers at globally competitive costs, quality, and scale. Not otherwise.

Background of the Study and Choice of Economies:

The four international destinations chosen for the study were based on two factors. First, these are destinations that global investors consider and compare before moving large-scale manufacturing investments. Second, these countries are the most dynamic manufacturers and exporters of electronics goods – improving from relatively low exports only 20 years ago. In 2020, China's electronics exports were about 81 times that of India, and exports of the others ranged between 4.6 times (Thailand) to 11.3 times (Vietnam). 

The PLI Schemes for Semiconductors, Smartphones, and IT Hardware underscore the government's importance to Electronics as a priority sector. In turn, mobile is a leading contributor in the US $75 bn domestic electronics industry, which is expected to increase 3.7 times, spurred significantly by a 13-times increase in exports by 2026.

Some Important Tables: 

Comparison of Number of Tariff Lines with Zero Tariffs

Comparison of MFN Tariffs for 88 HS 8 Digit Lines of India With Non-Zero Tariffs

Note: * = Adjusted for impact of FTA on applied tariffs of Vietnam. The number in the parentheses show the situation with MFN tariffs

High Tariffs on Inputs Negate the Effect of PLI Schemes

Notes: (1) According to Industry Feedback, Bill of Materials (BOM) accounts for around 70% of the cost of a Smartphone, hence the total cost increase is 8.08% X 0.7 which is equal to about 5.7%. In addition, there is a 10% Social Welfare Surcharge levied on the Basic Customs Duty.

(2) Industry estimate of average support through PLI.