India's semi-legal "grey" market will not disappear as import tariffs drop; it will become legitimate
One of the (admittedly minor) aims of this year's Budget (see Red tape, now with more holes) was to curb India's vast semi-legal market in smuggled computer parts. In his speech to Parliament the Finance Minister Dr Manmohan Singh said that some of the import duty reductions (for integrated circuit boards and hard disk drives) were "likely to reduce the grey market in these products." They are, but not quite in the manner that has been hyped by the country's industry journals.
The grey market in computer parts and locally assembled machines is present in Bombay, Bangalore, Calcutta and other Indian cities, but in the past few years an organised smuggling route has developed, bringing goods straight out of factories in Singapore, via Nepal, with which India has a free-trade agreement, to New Delhi. Although the agreement does not include goods brought into Nepal for resale in India, it is hard for the lax border controls to stem the flow of this traffic.
The goods sold are extremely cheap, barely 10% above the ex-factory price (a brand-new Seagate 540 megabyte hard disk costs little more than $200). The breakdown, according to a reliable source in the New Delhi market located at Nehru Place, is 7% in tariffs within Nepal; 2% for the smugglers, euphemistically called "couriers"; and only 1% for the Nehru Place traders. The last, which represents the commission traders charge to other traders or "known" buyers, varies in retail sales, although it rarely reaches the 10% margin often cited by those opposed to the grey market. While traders naturally try charge customers what they will pay, the intense competition tends to bring the prices down. And as they have perfected just-in-time deliveries to the tiny offices where they hold no stocks (foiling Customs raids and decoys, whose presence even regular customers can smell in the air), their overheads are low. The flip side is that prices change every day (often decreasing) depending on shipments, demand and supply; the price changes are passed on to the consumer.
The traders make their money on volumes - the share of the grey market is estimated variously at between 25% and 50% of the total domestic computer hardware industry. Its turnover, nationwide, is somewhere between $200 million and $400 million. Most sales are not to end-users, who find the somewhat shady atmosphere disconcerting (although the possibilities of paying in cash are attractive - India has a large black-market economy). A significant portion of component sales, particularly of expensive processors such as the Pentium, as well as disk drives, are to "reputed companies," who are well known to supplement their duty-paid imports, which severely affect their profit margins and price competitiveness. Such companies frequently refer potential clients worrying about costs to the hundreds of small, "home-made" brands that live off the grey market, forming by far its largest customers.
"We are not happy with the duty reductions," says a grey market source. Not because, as commonly assumed, the grey market can't compete on these new terms - branded computers still cost between 30% and 50% more than machines assembled from grey market parts (for a labour charge of about $10). But because it feels sandwiched between the competitive pressure from brand names - the grey market is not known for quality of service - on the one hand, and high duties - with the accompanying Customs raids on evaders - on the other. "The big companies want to keep duties high," alleges the source, who would like them to drop.
This feeling is widespread. Says G S Malhotra, an authorised dealer in computer monitors and one of the few people at Nehru Place willing to go on record, "Import duty should be brought below 9%" - the cost of smuggling through Nepal - "and then the grey market will become white." Mr Malhotra's model is the huge assembled-computer market in Singapore and Taiwan, known for nothing but prices and the sometime home of such low-cost giants as Acer. For in India as elsewhere, there will always be a large demand for machines from companies that sell cheap, never mind the mediocre service and far from plush furniture. The grey market is not in its death throes. It is only about to moult.
TECHONOMIST COPYRIGHT NOTICE AND SUBSCRIPTION
(C) Copyright 1995 Deus X Machina, Rishab Aiyer Ghosh. ALL RIGHTS RESERVED.
This article may be redistributed in electronic form only, provided that the article and this notice remain intact. This article may not under any circumstances be redistributed or resold in any non-electronic form, or for compensation of any kind, without prior written permission from Rishab Aiyer Ghosh (rishab@dxm.org)
This article is from the Indian Techonomist (http://dxm.org/techonomist/), the newsletter on India's information industry. Annual subscription (monthly print edition plus e-mail bulletins) is for US$ 595 or equivalent. For information, contact Rishab Ghosh by e-mail at rishab@dxm.org, call +91 11 2454717 or post to A4/204 Ekta Apts, 9 I.P. Extn, New Delhi 110092, INDIA.