It’s all Grey Out There



Finance Minister Yashwant Sinha’s decision to lower duties on mobile
handsets will have little impact on the grey market, which looks set to offer
handsets at prices much lower than official rates. Sinha raised the basic import
duty from 5% to 10%, but scrapped the 16% countervailing duty. The current
reduction in duties is expected to lower handset prices by about 8-9%, not
enough to threaten the grey market. To significantly impact on the grey market,
the basic duty should have been brought down to 2-5%.

No Ticket to Ride

  • Import duty is upped from 5% to 10% while Countervailing duty is scrapped.

  • Vendor price cuts not likely to exceed 10%

  • The grey market, which controls 60% of sales, is not likely to be hit.

  • A long way to catch up with China, which has the largest mobile base in the world.

If import duties had fallen considerably, traders may have chosen to pay the
required duties and import handsets through official channels, rather than take
unnecessary risks like under-invoicing. And even though Nokia announced a 10%
reduction in prices following the duty cuts, the grey market prices will
continue to be lower. This is because in addition to import duties, mobile
phones also attract sales tax and this falls under the purview of state
governments. Smuggled phones, on the other hand, bypass these duties.

The grey market accounts for more than 60% of total handset sales in India.
This is primarily composed of illegal imports, which range from an average
discount of 35% to 45% for the consumer. This sometimes goes upto 60% in case of
certain handsets. The main reason for this huge price differential is the 5%
import duty and the 16% countervailing duty which illegal importers manage to
avoid. A lower import tax duty could not only help in ensuring a rapid decrease
in the illegal market for mobile handsets in the country and also contribute
substantially to the central and state exchequer.

Price cuts not enough
With the Budgetary proposal of a reduction in overall duties on cellular
handsets, companies including Nokia have announced that handset prices are
likely to come down by about 10 % over the next few weeks. "We are in the
process of studying the full implication of budget announcements. But our
preliminary estimation is that for the customer, prices may come down by
10%," says Sanjeev Sharma, country manager of Nokia. He, however, pointed
out that the price cut might not be immediate, as it would take a few weeks to
exhaust the old stocks. Nokia has as many as 13 to 14 models in the market,
ranging from Nokia 3310 (Rs 8,500) to Nokia 9210 (Rs 44,000). Meanwhile,
Motorola has plans to announce price reduction on handsets in the near future.
"While we are in the process of working out the details currently, it would
be fair to say that the customers could look forward to about 10% reduction in
prices," explains Pramod Saxena, country head, Motorola. Amongst various
handset models of Motorola, V3688 is priced at Rs 12,995, and V66 comes with a
price tag of Rs 22,000 at present.

Post-budget, Siemens too has dropped prices. Its A35 handset is now priced at
below Rs 4,000 while C45 is available for Rs 6,990. It would be interesting to
observe the effect that the move would have on the growth of the mobile user
base. The Indian cellular base has almost doubled in the past 12 months from 3
million in early 2001 to just under 6 million in January 2002. However, the
cellular penetration in the country is still an abysmal 0.006% as compared to
more than 11% in China which has a mobile user base of more than 140 million.
This can be partly attributed to the low costs of handsets in China as most
cellular companies have their manufacturing base there.

Obviously, India has a lot of catching up to do. Costs does matter
significantly. With airtime rates coming down, its high time there is a
corresponding reduction in handset prices to bridge the gap.

Amit Sarkar in New Delhi

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