World’s Largest Mobile Factory, Yes, but India Is Importing More Electronics Than Ever

On the surface, the government's local smartphone manufacturing push appears to march hand-in-hand with India's growing appetite for digital devices. However, nearly 50% of the total electronic products sold in India are imported.

New Delhi: The Narendra Modi government on Monday announced the grand opening of the world’s largest mobile phone plant just outside India’s capital. 

Spread over 35 acres in Noida’s Sector 81, Samsung’s Rs 4,500-crore facility will be able to produce 120 million smartphones and will create anywhere between 10,000 to 15,000 local jobs.

The announcement – which coincided with South Korean President Moon Jae-in’s visit to the capital and a publicity blitz that included a ride on the Delhi Metro – has largely been seen as a feather in the Centre’s ‘Make in India’ cap.

“Very big step forward. Make in India takes a big leap forward,” tweeted commerce minister Suresh Prabhu, adding that the Modi government is committed to creating jobs, increasing manufacturing and getting more investments into the country.

The NDA-II government’s local smartphone manufacturing push has, on the surface, appeared to march hand-in-hand with India’s growing appetite for digital devices. Over a 100 new mobile phone manufacturing plants have been opened in India in the last four years. Meanwhile, in 2017, India overtook the US to become the world’s second-largest smartphone market after China.

However, what Prabhu’s celebration leaves out is that even today, nearly 50% of the total electronic products sold in India are imported from other countries. The proportion of components that are imported and feed India’s total demand for electronics is even higher, at approximately 75%-80%.

In recent years, imports of electronic items have surpassed gold and gold products and are well on the way to beat India’s costliest import of all time – oil.

More importantly, these increasing imports come despite India’s push for local manufacturing and the Modi government’s ‘Make-in-India’ programme.

In fact, as the table below shows, even as India’s appetite for smartphones and other electronics products has increased, the consequent increase in import of electronics items has started to dangerously impact the country’s current account deficit.

India’s electronic items imports have nearly doubled in the last five years. In the fiscal year which ended in March 2014, the electronics trade deficit surpassed gold and gold products for the first time and has only increased over the last four years.

“Electronic goods deficit is now very close to 9MFY18 annualised oil deficit of $64 billion,” said Edelweiss Securities, in a report dated February 28.

“Even in terms of size, its importance in determining the direction of overall trade deficit has increased multi-fold – now accounts for ~33% of trade deficit (vs. 10-12% five years back),” the brokerage firm’s report noted.

According to Bloomberg, data for the 13 months to May 2018 shows that electronics imports were valued at $57.8 billion, way more than the $35.8 billion worth of gold purchases.

While mobile phones smartphones don’t account for all electronics imports –  besides computers and the like, even certain renewable energy technologies required for the solar industry come under the ‘electronic items’ category –  the failure of Make-in-India to make a dent in India’s costly imports is worth examining.

While the number of mobile phone plants set up in India has indeed increased sharply, most of these ‘manufacturing units’ are largely assembly centres, where workers put together sophisticated components that are imported from China and other South-East Asian countries.

As The Wire has reported, a 2016 study by IIM-Bangalore and Counterpoint Research found that the current contribution of locally sourced (or Made in India) components and sub-components accounted for just 6% of total value of components that go into a phone, a fact that the study calls “economically unfortunate”.

For instance, in 2015, the total value of mobile phones sold in India was around $11.5 billion. Out of that, the “true local value addition generated in local component sourcing and local assembly will be close to $650 million”, according to the IIM-Counterpoint study.

Credit: PTI

Senior IT ministry officials, in discussions with reporters on Tuesday morning, insisted that some companies (such as Samsung and its Noida plant) do a greater amount of local value addition, but declined to provide numbers.

While this could be true, with the absence of hard and publicly available data, it is difficult to make a claim one way or the other.

Moving from assembly to manufacturing

Rising electronics imports and low-level local value addition in India’s mobile phone assembly plants all add up to a grim future.

While domestic production of electronics (finished products, not components) in 2016-2017 equaled the amount spent on imports, it is unlikely to stay that way. A 2017 report from Assocham_NEC noted that imports would soon outpace domestic production, leading to a whopping import requirement of about $300 billion by 2020.

Another separate report by Deloitte Touche Tohmatsu has noted that India’s electronics imports could surpass the country’s oil imports by 2020.

What, then, could reverse this situation?

“The problems plaguing electronics hardware production is the same that affects any high-level type of manufacturing in India. All the usual factors apply including labour law reform and land acquisition problems. Taxation as well. What killed Nokia’s plant in Tamil Nadu, which was earlier the world’s largest mobile phone plant? It was essentially a service tax controversy,” a senior Indian executive of a Chinese smartphone company, who declined to be identified, told The Wire.

Indeed, while foreign direct investment (FDI) inflows are largely seen as a bright spot for India, the amount of money that has come into the electronics category is less than 1% of total inflow.

With Samsung’s new investment in Noida, it is likely that the total amount of investment that has gone up in setting over 100 new mobile phone plants in India over the last five years is less than Rs 15,000 crore.

If the Modi government is still set on achieving its ambitious target of becoming “net zero imports” in electronics by 2020, it will need a lot more than the world’s largest mobile phone plant.