Monday, December 16, 2002		Feature

Grey sells
Peeyush Agnihotri

GREY glitters, genuine does not. At least in the cellular phone industry. That, because of it, the legitimate cellphone industry is seeing red is another matter.

No wonder, according to IDC (International Data Corporation), the legal market for cellular handsets has remained miniscule. The share of grey market shot up from 74 per cent in 2000 to 89 per cent by the end of 2001.

Grey market is basically unauthorised sector that comprises smuggled handsets, parallel imports and those instruments for which taxes are not paid. Many are refurbished instruments sourced from Singapore, Hong Kong and Mid-East countries.

Charm of grey

The reasons why most of the purchasers are going grey are not hard to seek. Pricewise, there is a difference because of duties like customs, sales tax and octroi. As a cascading effect handset vendors are not coming forward to establish after-sales support infrastructure because the legal market has not grown in India. In certain cases, the retailers themselves insist on selling ‘grey’ handsets, minus the bills. After the transaction, they hand down their business card, which serves more like a warranty card, to the customer.

Current scene

Even though, globally, though cellphone sales fell by 3.8 per cent, India, being an unsaturated market, holds promise. The Indian cellphone market, according to the Cellular Operators Association of India, increased from 1.2 million subscribers in March 1999 to nearly 9 million by the end of October 2002. Gartner, a research body, estimates that the number of mobile subscribers in India is expected to show rapid growth and is likely to be 44 million by 2006. Predictions are that by 2006, India will be third-largest cellular market in Asia, besides China and Japan.

The reasons why the market will grow five times in four years are obvious. Since 2000, average service rates have fallen by two-third due to increase in competition. An interesting observation is that one out of every three cellular subscribers in India is moving to a competing service. At present India has the lowest average phone call price on the earth (merely 2 cents per minute) and the projection is that due to low tariffs and falling handset prices, triggered by competition, cellphones may become affordable gizmos. In fact, they already are. Mohit Kapoor from Alcatel says that more than 55 per cent of cellphones sold in India currently are being purchased by the lower to middle level income groups.

Clients’ choice

Interestingly, ease-of-use and features come last on the priority list of Indian buyers who purchase cellphones. Three most important factors influencing the buying behaviour are price, weight and appearance. They are followed by battery life and clarity of voice. According to an IDC report as applicable to installed bases in India, Nokia is the market leader followed by Siemens, Motorola, Panasonic, Samsung, and Sony-Ericsson, in that order. Others share 7 per cent of the market (see graph). Statewise, Punjab stands seventh, as far as cellphone subscriber base is concerned. Needless to say, the IT state of Andhra, tops the chart.

Cause and effect

Without government’s initiative (or lack of it) nothing is possible. Take the case of Tamil Nadu. The state government’s decision there to hike sales tax from 12.5 to 20 per cent for cellphones saw the cost crossing the MRP prevalent in other states. In addition, handsets suffered 2 per cent levy because of multi-point taxation. As a result, grey market flourished and manufacturers suspended the supply to dealers.

Indian Cellular Association (ICA) says 25 to 30 per cent of the market has become legal this day, thanks to the government’s move of abolishing counterveiling duty (CVD) of 16 per cent. At Chandigarh, in particular, 70 per cent of the market is legal. Earlier, Punjab was largely grey. Ever since, sales tax was rationalised to 4 per cent, 50 per cent of the market turned legal. However, octroi that stands at 3 per cent in Punjab haunts the legal market. Ditto for sales tax in Haryana and Himachal (12 per cent).

"The government is likely to lose nearly Rs 5,360 crore of revenue by 2006, courtesy the grey market, in case corrective measures are not taken to rationalise the duty structures applicable on imported mobile handsets," Pankaj Mohindroo, president, ICA, says.

Curbing grey market

Mohindroo says that for legal market to thrive basic custom duty should be reduced from 10 per cent to 5 per cent. "Special Additional Duty (SAD) of 4 per cent should be abolished and mobile handsets should be removed from the 1/6 income-tax eligibility definition. Then import of mobile handsets under the Rs 12,000 ceiling for free import offered to passengers returning after a foreign trip should be disallowed. Only then can the grey market be curbed," he says

That’s a long wish list. Only time will tell if the industry and government combine will manage to tackle the grey market. Till then most consumers will continue exercising their choice and go for the cheaper option.