In a social media post on Tuesday, former Reserve Bank of India governor Raghuram Rajan raised concerns about India’s mobile phone exports and warned that growth in the sector is being driven only by assembly and not actual domestic manufacturing. Rajan has long been a vocal critic of the government’s economic policies and the latest comment comes as no surprise. But is there any merit in what he is saying?
It is indeed true that in the last five years, exports of mobile phones from India have grown rapidly in absolute and value terms, while their imports have declined. In fiscal year 2018, India imported mobile phones worth $3.6 billion and exported only $334 million. Cuts in FY23 and exports swelled to over $11 billion, while imports dropped to just $1.6 billion.
While it looks good on paper, it doesn’t reveal the whole story. Mobile phone imports started falling a few months after April 2018, when higher import duties were imposed. Meanwhile exports began to rise, and by the end of that year more mobile phones had been shipped out of the country than imported. This was around the same time that major components of mobile phones, such as semiconductors, printed circuit boards, displays, cameras and batteries, began to be imported on a large scale.
The combined import of these components in FY2023 was $32.4 billion. It is not easy to determine the same figure for FY18 as some of the Harmonized System (HS) codes for components have changed over the years. But an analysis by Professor Ashok Modi of Princeton University indicates that combined net exports of finished mobile phones and components fell from $12.7 billion in FY18 to $21.3 billion in FY23.
This shows three things. One, expansion in terms of volume of exports as well as domestic mobile phone market of India. Second, the depreciation of the rupee against the dollar. Third, India’s dependence on imported components has not reduced much.
It also stems from bilateral trade data between India and China. China continued to be India’s second largest trading partner with merchandise trade of $113.81 billion in FY23, a marginal decline of 1.7% from FY22. But the decline was due to a decline in goods exports from India to China and not the other way around. Imports from China increased by 4% to $98.51 billion during the year. Imports stood at $76 billion in FY18. As a result, India’s growing trade deficit with China widened further to a record high of $83.2 billion. This has more than doubled from FY2014’s $36.2 billion. The deficit was $63 billion in FY18.
Machine parts and electrical equipment form the bulk of India’s imports from China. In FY22, machinery worth over $50 billion was imported. It fell by a mere 2.75% to $48.74 billion in FY23. This is still over $29 billion of 2019-20 imports. China accounts for 40% of all machines imported by India.
Why has the import of components not dropped despite the government’s Production Linked Incentive (PLI) scheme? Professor Modi argues that this is because the subsidy is paid only for the completion of manufacture in India and not on the exact value added. It has allowed manufacturers to only import from abroad and assemble here.
With the scale of manufacturing in the country increasing and manufacturers gradually ramping up component production, component imports should start coming down in the next few years. Should India be able to get semiconductor manufacturing off the ground, it will take care of another big imported piece of the puzzle.
For now though, Rajan is right. It is to a large extent the assembly that is giving a boost to mobile phone manufacturing in India.
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Updated: May 31, 2023, 07:51 PM IST