Rescuing the Lost Child

Indian Telecommunications was the protected child of the government of India till the liberalization process for the telecom sector commenced in early 1990s. Since then the telecom sector has seen an unprecedented growth. Ever since then the growth has always surpassed even the most ambitious targets set by the government, and still continues unabated. The target growth of telecom of 7% by 2005 and 15% by 2020 set in the Telecom Policy 1999, was achieved in 2004 and 2007 itself.

Notwithstanding the above, the target of 600 mn connections set by the Planning Commission for the end of 11th Five Year Plan, ie, 2012 was achieved in February 2010 itself. The time is not far when we would be crossing the 'One Billion' mark before the end of the year. The tele-density in the country started rising from a meager 0.8% in 1991 to 162.57% in the urban areas and 39.35% in rural areas as of May, 2012. However the growth of the telecom equipment manufacturing sector never took off despite the growth of the telecom sector by leaps and bounds year on year.

The first steps taken by the government in this direction were with the issue of licenses in the service sector for providing 'Value Added Services' and for the manufacturing sector for the 'Manufacture of Transmission Equipment'. At that time the major manufacturing activities in India in the telecom sector were confined to the Public Sector Units (PSUs) like the Indian Telephone Industry coupled with contributions from Bharat Electronics (BEL), ECIL, Hindustan Cables Limited ( HCL), Gujarat Communications Electronics (GCEL), and some other state owned PSUs.

For most of the requirements of equipments which were not manufactured within the country and had to be necessarily imported, the Indian government had mandated that equipments likely to have continued supplies were imported along with Technology Transfer Agreements so that the technology is absorbed in the country and domestic manufacturing commences thereby reducing or eliminating our continued dependence on imports over a period of time.

Although there were some advantages of this model but there were severe bottlenecks in meeting the demand for equipment by these PSUs leading to inordinate delays in getting equipment thus throttling the growth. Furthermore, these PSUs were also not geared to keep pace with the fast technological advancements in the field of telecom.

The scenario changed completely with the introduction of mobile telephony and introduction of private operators in the country. Since the mobile telephony was new and the technology virtually non-existent in the country, all the operators resorted to large-scale imports which had virtual support from the government in their endeavor to proliferate telecom services to the length and breadth of the country hitherto starving for even basic communication facilities.

Initial Government Apathy

As the private operators started rolling out their networks in all the states, the telecom network started increasing its footprints everywhere. The imports of telecom equipment also grew with the exponential growth of tele-density, whereas the domestic manufacturing sector, unfortunately, started declining sharply. The exponential growth of the telecom service sector was possible because of the positive steps taken by the government through liberal policies and pro-active decisions.

However the Indian telecom manufacturing sector did not get the same kind of attention and got ignored for some reason or the other as it got a step-motherly treatment resulting in its continuous decay and is now languishing in a pathetic state. The market share of the Indian manufacturing sector was never very impressive but still had a significant contribution by way of technology transfer or some percentage of value addition.

But, as the uphill journey was being smoothly undertaken by the service sector, there was not a single effort by the government to hold hands with the manufacturing industry and also take it around. Perhaps, the entire focus shifted on just increasing the tele-density and achieving the long cherished goal of providing connectivity to the remotest parts of the country. Whatever little hope was left for the manufacturing industry got killed with the introduction of 'zero duty regime' for import of telecom equipment.

Despite the government including very rosy and bold statements about the manufacturing sector in the National Telecom Policy announced in 1994 and subsequently in 2004, no concrete follow-up actions were initiated by the government to provide an impetus to the manufacturing sector. Even the Prime Minister of India expressed concerns during his inaugural statements made at India Telecom Summit each year right from 2008, there was no action by the concerned government departments to initiate corrective steps to provide a conducive environment so that this sector could also grow.

Hopes from NTP-2012

Hopes have, however, now been revived for the telecom equipment manufacturing sector with the announcement of NTP-2012 which envisages:

“To make India a Global Hub for telecom equipment manufacturing and a center for converged communication services.”

“Promote the ecosystem for design, Research & Development, IPR creation and manufacturing to meet the Indian telecom sector demand to the extent of 60% and 80% with a minimum value addition of 45% and 65% by the year 2017 and 2020, respectively.”

The National Telecom Policy (NTP) and the Preferential Market Access (PMA) Policy both envisage that by the year 2020, the market share for the domestic product grows up to 80%. On the face of it, the figures slated to be achieved by the manufacturing sector are very ambitious and in case it is achieved, it will do a lot good for this sector and bring India on the global map of telecom equipment manufacturing.

Time to Build Momentum

Having come this far and government now having taken some bold and forward-looking-steps in the right direction, it is the time to keep the momentum going on. To fulfill the vision of government of India by achieving these figures for market share, the government and the industry need to move in a careful manner. Whilst on one hand, we must ensure that the preferential market share supposed to inaugurate the domestic manufacturing activity also actually flows to the real domestic manufacturing companies.

Also, advantage of these policies should not again be cornered by the foreign manufacturing companies who use the policy provisions to their advantage and continue to enjoy the dominant market share they have already grabbed over a period of time because of apathy of all concerned including the government. Some of the key things which are now required to be done by the government to ensure that the domestic industry grows on the basis of real manufacturing activities rather than on superficial activities are:

• The definition of a domestic product needs to be adopted carefully so that the growth of the manufacturing sector is not limited to foreign manufacturers but results in growth of at least a few domestic companies which are able to rise to the occasion and help the government in achieving the set objectives besides providing a formidable competition to the global players.

TEMA has suggested the following definition for a 'Domestic Product':

“All those products for which R&D is done in India and the know- how and control resides in India. Product IPR, viz, brand name, source code of proprietary software, hardware, design, Bill of Material etc, exclusively created for the product must be globally owned solely by an Indian company.

Commercial exploitation of the product IPR must be carried out solely by an Indian Company and all proceeds including global proceeds must accrue to it in India.”

• Create a Task Force to oversee the implementation and compliance to the objectives and targets defined in NTP 2012 and PMA Policy by drawing out an action plan with clear time-bound milestones.

NTP 2012 and PMA Policy have outlined ambitious targets for the manufacturing sector like meeting the Indian telecom sector's demand to the extent of 60% and 80% with a minimum value addition of 45% and 65% by the year 2017 and 2020, respectively. There are also some other targets defined similarly in these 2 policies.

In order to ensure that there is a check-and-balance mechanism which ensures that these targets are met in true sense, the government will have to monitor the defined milestones on a periodical basis and provide on course correction, if need be, to accomplish these targets or at least reach close to these. If it is not done, all these envisaged targets in these 2 forward looking policies will get buried on paper without changing the ground reality.

• Facilitate setting up of semiconductor wafer fab facilities at the earliest. These are the pre-requisites for creating a robust Electronic System Design and Manufacturing Sector and constitute a significant percentage or the 'Bill of Material (BOM)'.

The biggest handicap of the electronics and telecom manufacturing sector is the absence of any manufacturing facilities for semiconductor devices and various other components required as inputs for any electronic/telecom product. There is almost a complete dependence on the outside world. A time has come when the government needs to facilitate and promote setting up of such facilities on war footing so that the there is an inclusive growth of the electronics and telecom manufacturing sector with substantial amount of indigenous value addition and reduced dependence on foreign countries.

• Encourage local R&D, Innovation & IPR creation by providing all-round support to identified manufacturers already having established R&D facilities through an R&D Corpus Fund in Public Private Partnership (PPP) mode.

In order to make a mark on the global map India needs to encourage local R&D facilities so that we have indigenous product innovation, design and IPR creation for identified products and technologies. This will also help India in making notable contributions towards the formation of Global Telecom Standards through adoption of these designs and IPRs. In this direction, the formation of Telecom Standardization Development Organization (TSDO) already initiated by the Government of India is a very welcome and timely move and will go a long way in increasing India's contribution in global standards formation.

• 
  Incentivize private operators buying domestic products through a well-defined formula.

In line with the provisions of National Telecom Policy (NTP) 2012, it is necessary that an incentive/disincentive scheme is introduced for the Licensed Service Providers for buying/not-buying domestic products. TEMA has proposed 'an R&D cess of 5%' to be charged from all the Licensed Telecom Service Providers for this scheme. Any Licensed Service Provider buying the designated percentage of domestic products as stipulated in the PMA should be incentivized by exemption from this contribution whereas those who do not buy at all or buy lesser should be made to contribute in a graded manner from 5% to 0%.

• 
  Restructuring of tax regime to create a conducive environment for the manufacturing sector.

With the introduction of 'Zero Custom Duty Regime' on import of all telecom equipment, the domestic industry is suffering from a fiscal deficit of about 20%. The government needs to address this imbalance quickly and have a relook at the existing taxation structure and redefine it so as to erase this initial fiscal deficit/handicap and provide the much needed level playing field for the domestic manufacturers.

It is interesting to note that even after more than a century of the existence of telecommunications globally, at the moment, there are only 5 to 6 telecom equipment manufacturers in the world who are sharing the huge equipment pie in the world. In the beginning of the mobile communication era, the global market was shared between 3-4 European telecom equipment suppliers like Ericsson, Alcatel, Siemens, Nokia, etc, till the bandwagon was joined by 2 notable Chinese vendors, namely, Huawei, and ZTE about 8-10 years back.

Meaning thereby that there is still scope for a few more suppliers to come up and not only realign the market share but also intensify the competition. Given the size of the domestic market itself (expected to grow to $4 bn by 2020 as per industry estimates), this place is well deserved by Indian manufacturers.

Now is the time for a bit of handholding by the government with the domestic industry and provide the much needed incubation-like support to achieve what it itself has aimed for. Once out of the woods, this industry will grow by itself in its endeavor to prove its mettle in meeting the government's objective of making India 'A Global Hub For Telecom Equipment Manufacturing' coupled with the lust to grab a well deserved share of the huge global telecom equipment market in competition with global giants which will act as a catalyst for its growth.

Ashok K Aggarwal
The author is honorary
director general, TEMA
vadmail@cybermedia.co.in