--- title: "Priced out of India's digital revolution: Taxes weigh on smartphone demand" type: "News" locale: "en" url: "https://longbridge.com/en/news/281223126.md" description: "India's digital economy faces challenges as smartphone sales decline due to rising costs and high taxes. In Q4 2025, shipments fell by 7% year-on-year, with memory prices surging and an 18% GST exacerbating the situation. This impacts the affordability of smartphones, crucial for many in rural areas. The government’s Production-Linked Incentive (PLI) scheme aims to boost manufacturing, but high consumption taxes hinder demand. A modest price reduction could significantly increase smartphone adoption, driving economic activity and tax revenue." datetime: "2026-03-31T09:08:54.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/281223126.md) - [en](https://longbridge.com/en/news/281223126.md) - [zh-HK](https://longbridge.com/zh-HK/news/281223126.md) --- # Priced out of India's digital revolution: Taxes weigh on smartphone demand India’s economy has been on the ascendant over the last decade, driven by large-scale, digital-first policy reforms. These well-thought-out strategic interventions have led to the creation of an ecosystem that empowers citizens. The Jan Dhan Yojana has brought more than 570 million previously unbanked citizens into the formal financial system, laying the foundation for the “JAM trinity” — Jan Dhan, Aadhaar and mobile — enabling direct benefit transfers and reducing leakages in welfare delivery. The Unified Payment Interface (UPI) has widened digital penetration across India by nudging millions towards digital payments. The removal of goods and services tax (GST) on individual insurance premiums is helping India move towards becoming an insured nation. Tying this together is affordable connectivity. India has one of the lowest mobile data costs globally, providing internet access to vast segments of the population. Through all this, India has built one of the world’s most ambitious digital public infrastructures. However, the effectiveness of this framework rests heavily on smartphones that facilitate these transactions. Smartphones have seen a steady decline in sales. In Q4 of 2025, smartphone shipments fell by 7 per cent year-on-year, as rising input prices contributed to a decline in sales. Now, rising memory costs, rupee depreciation, and an 18 per cent GST are pricing millions of Indians out of the digital economy. **The issue is structural, not cyclical** Three forces have converged in 2026 to create what the industry is calling a black swan moment for mass-market smartphones. Global Dram (dynamic random-access memory) prices have surged by more than 50 per cent quarter-on-quarter in Q1 2026. Nand flash (non-volatile memory) prices have risen by 80-90 per cent. For an entry-level device, memory now accounts for 43 per cent of the total bill of materials cost, driving a 25 per cent increase in production costs in a single quarter, according to Counterpoint Research. Simultaneously, the rupee has depreciated about 5 per cent against the dollar over the past year, increasing imported component costs. Add to that an 18 per cent GST, the highest smartphone tax rate among major emerging economies. As a result, a sub-₹10,000 phone now costs 25 to 35 per cent more. India manufactures about 110 million smartphones annually, largely in the sub-₹20,000 segment. A demand collapse now threatens the economics of production lines across the country. **This is an infrastructure issue** The smartphone is now part of basic economic infrastructure. A farmer in Vidarbha uses his phone to check mandi prices before selling his produce. A dairy cooperative member in Anand receives payments and accesses her bank account through it. A daily-wage construction worker in Patna authenticates Aadhaar for rural job scheme wages. A student in rural Odisha accesses the DIKSHA e-learning platform by the National Council of Educational Research and Training. Tier-2, Tier-3, and rural India now account for over 70 per cent of new smartphone adoption and more than half of India’s internet users. Around 30 per cent farmers use smartphone; self-employed workers (58 per cent of India’s workforce), account for 30 to 40 per cent. For them, the sub-₹20,000 smartphone is key to livelihood. **The fiscal argument runs both ways** For GST rate changes, the focus is often on immediate revenue loss. In smartphones, the multiplier effect matters. First-time users enter the formal digital economy — driving UPI transactions, ecommerce purchases, fintech credit uptake, and spending on data and digital services, all generating tax revenue. A modest 5 per cent price reduction could add up to 3 million units annually in the sub-₹20,000 segment. The initial GST impact can be offset through downstream digital activity within three to five years. There is a policy contradiction. The government has invested heavily in making India the world’s second-largest smartphone manufacturer, with production at ₹5.45 trillion in FY25. Exports have crossed ₹2 trillion. Production-linked incentive (PLI) works on the supply side, incentivising manufacturers to produce in India. Demand depends on whether Indians can afford to buy those phones, which is shaped by GST. Today, the government subsidises production through PLI while taxing consumption at 18 per cent. As volumes fall in the sub-₹20,000 segment, manufacturing economics weaken; Indian manufacturing competitiveness depends on strong domestic demand. **The ITC challenge and its solution** Any honest treatment of this issue must acknowledge a technical complexity. Domestic smartphone manufacturers accumulate significant input tax credits (ITCs), estimated at 15-17 per cent, against which they offset their output GST liability. A rate reduction on output, if not accompanied by a mechanism to address this ITC position, could create an inverted duty structure that disadvantages domestic manufacturers. This is a solvable problem. The appropriate accompanying measure is a streamlined ITC refund mechanism for domestic manufacturers in the sub-₹20,000 segment, a provision already available under GST law for inverted duty situations. A GST rate reduction paired with accelerated ITC refunds delivers consumer affordability without penalising domestic manufacturers. Three interventions deserve serious consideration. The first is a two-stage GST correction: An immediate reduction from 18 per cent to 5 per cent on smartphones priced below ₹20,000, paired with faster ITC refunds to deliver price relief without creating duty inversion. The second is extending PLI support to the sub-₹20,000 segment, where value addition is weakest. The third deserves particular attention because the funding mechanism already exists. The government’s Digital Bharat Nidhi, a designated fund for digital inclusion, can provide an option for a direct consumer subsidy on sub-₹20,000 smartphones without requiring fresh budgetary allocation. China’s 2024 experience is instructive: A direct 15 per cent consumer rebate on devices below 6,000 RMB delivered measurable demand stimulus while supporting domestic manufacturing. An Indian equivalent, targeted at sub-₹20,000 devices and delivered through existing retail and ecommerce infrastructure, could be deployed faster than a GST Council revision. The fund exists. The need is documented. The policy decision now presents a clear opportunity to accelerate growth and unlock demand at scale. _**The author is former chairman of Irdai and former secretary of the Department of Financial Services, Ministry of Finance. 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