iPhones

Apple has steadily been increasing its focus in India as it tries to gain a foothold in the world's second-largest smartphone market. While the iPhone was always an aspirational device for most Indians, its pricing meant that only a few were actually able to afford one. That changed over the course of the last year as Apple teamed up with e-commerce stores to offer aggressive discounts and easy financing options.

The company also expanded its footprint in the country, from setting up an app development center to kicking off manufacturing operations in Bangalore.However, the company also faced significant pushback from the government. Apple applied for a single-brand license to open retail stores in the country, and that bid has been in limbo for over a year.

And now the government has shifted its policy on import duties for phones, hiking up the tax from 10% to 15%. The move is designed to incentivize local production of phones, which will in turn make Narendra Modi's Make in India initiative a success. Once the new duty goes into effect, iPhones will likely see a hike in price, at a time when Apple is trying to aggressively position them against Samsung's flagships.

What is Make in India?

Narendra Modi kicked off the Make in India initiative back in 2014 to make India an attractive destination for multinational brands looking to set up factories. The goal was to boost investment in key sectors like automobile, aviation, and electronic manufacturing.

The government rolled out lucrative incentives in the form of tax breaks, providing vast areas of land for free, and making it generally easier for foreign brands to conduct business. As a result, there have been significant investments in the country over the course of the last three years, particularly in the smartphone segment.

Samsung was one of the first to set up local assembly lines in the country, and all devices sold by the company are assembled in India. Xiaomi has two factories, and is setting up a third facility. OPPO and Vivo have also set up manufacturing facilities, as has Huawei. Foxconn has also invested $5 billion in a facility in India.

The government is now taking measures to promote Make in India by hiking import duties of phones from 10% to 15%. The move has adverse consequences for Apple's ambitions, as the company imports a majority of units that are sold in the country.

How does it affect iPhone pricing?

Apple stands to lose the most from this policy shift, as nearly 90% of iPhones sold in India are imported. Right now, the iPhone SE is the only product that is locally assembled.

Apple is said to have asked Indian government officials to defer the upcoming tax hike while the company expands its manufacturing efforts, but it looks like the government isn't ready to budge. According to a senior government official with direct knowledge of the matter:

We have told them, please come and invest but we cannot do things that go beyond our policies. We cannot do things only for you. They are coming around (to our view).

The only viable option for the company is to boost local manufacturing, or absorb the hike in duties and retain the same price, taking a hit on the profit margin. The latter is untenable in the long run, so it's likely we'll hear more about Apple's expansion into India over the coming months.