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%.

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