Smartphones in India might get dearer, as the GST on them has now been increased to 18% from 12%.
India is one of the biggest and fastest-growing smartphone markets in the world. The consumption doesn’t seem to have been affected by the ongoing economic slowdown across the country. To capitalize on that behavior, the Goods and Services Tax council decided to go ahead with the rate hike.
As per IDC, India was one of the few countries that showed positive growth in terms of smartphone shipments, growing by 8% year-on-year. However, considering India’s population, smartphone penetration is just about 30%, highlighting a lot of growth potential. Moreover, the Government has also successfully been able to encourage local manufacturing across the board.
The price elasticity of demand for smartphones is very high in India. An increase in the GST could very well imply an increase in the final selling price of these products and slow down the consumption and cause a reduced demand. In the budget segment, which comprises of 94% of the market, brands are known to price their offerings very competitively. With this sudden shakeup, they might be compelled to pass on this expense to the consumers, as smartphone manufacturers may not be able to absorb this hike quickly. In absolute terms, manufacturers will have to resort to about a 5% increase in the MRP of the products to continue to have the same inflow.
In the short run, along with increased prices, brands might also resort to a longer replacement cycle, which was one of the drivers of the above-average growth in smartphone sales in India. We expect some budget manufacturers to announce a hike in their smartphone prices as a kneejerk reaction.