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Manufacturing Hub: TRAI recommends indigenous telecom equipment production

May 30, 2011
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The government has been advocating stepping up domestic telecom equipment manufacturing (TEM). Given the current growth rates that India enjoys, analysts and the government expect the number of telecom users to cross 1.5 billion by 2015 and 5 billion by 2020.

This level of growth will necessitate huge investments in expanding telecom networks and boost the demand for all kinds of telecom equipment. In light of this expected growth, the Telecom Regulatory Authority of India (TRAI) has recently released its recommendations on the “Telecommunications Equipment Manufacturing Policy”.

There is currently no telecom equipment manufacturing policy in place. Although the New Telecom Policy, 1999 contains stipulations regarding the promotion of domestic products, export and utilisation of indigenous equipment, there is no plan or scheme for the implementation of these aspects. TRAI’s recommendations have, therefore, been framed to fill this void.

The recommendations aim to significantly enhance the share of domestically manufactured products, which include products manufactured by companies registered in India. They can be either Indian manufactured products (IMPs) or Indian products (IPs) based on where the intellectual property rights (IPRs) reside. While for IMP, the IPRs can reside outside India, for IPs, the IPRs will necessarily have to reside in the country.

According to TRAI, the demand for telecom equipment in 2009-10 was pegged at Rs 547.65 billion or about 5.5 per cent of the total global demand. This is projected to grow to Rs 965.14 billion by 2015 and Rs 1,700.91 billion by 2020.

This represents a huge potential. Besides, with the Asia-Pacific region accounting for a major share of future telecom growth, the possibility of India serving as a manufacturing hub could be that much bigger.

TRAI’s recommendations present a case for domestic manufacturing in the country, which has been negligible so far. It mandates that telecom firms source 80 per cent of their network equipment and other related infrastructure from domestic manufacturers in a phased manner. This also includes networks produced by the manufacturing units of foreign vendors located in India.

Further, TRAI has urged the government to ensure that companies owned by Indians and located in India get 50 per cent of all telecom network orders by 2020. Currently, locally manufactured telecom hardware accounts for 12-13 per cent of mobile operators’ needs. Of this, Indian companies account for a mere 3 per cent.

Apart from recommending that domestically manufactured products be given preferential market access, TRAI has also recommended that products of foreign equipment makers should account for only 30 per cent of all equipment orders by 2020.

While conceding that the cost of implementing the recommendations would amount to about Rs 1 trillion over the next 10 years, the regulator has also emphasised that the return on investment would be ten times more.

TRAI has also suggested the setting up of a Telecom Manufacturing Fund (TMF) with an initial amount of Rs 30 billion, to provide venture capital to Indian companies entering this space in the form of equity and soft loans.

Key measures proposed by TRAI:

•  All government licensees are required to give preference to IPs and IMPs, in that order, before accessing low-value-added products (LVAPs) or imported products.

•  Domestic product manufacturers with an annual turnover of less than Rs 10 billion will get subsidy for equity capital and working capital for a period of five years, at the rate of 6 per cent for IP manufacturers and 3 per cent for IMP manufacturers.

The following are the fiscal incentives that have been proposed:

• The total incidence of excise duty and value added tax (VAT) on domestically manufactured products to be limited to 12 per cent.

•  Central sales tax (CST) of 2 per cent on domestically manufactured products to be removed or an equivalent tax/duty to be imposed on imported products.

•  Comparative tax disadvantage to be removed for locally manufactured products by reducing VAT and imposing tax/ duty equivalent of 2 per cent on imports.

• Domestic handset manufacturers to be exempt from countervailing duties on imported capital equipment and excise duty on locally sourced capital goods.

•  Deferment of excise/CST/VAT/goods and services tax (GST) for a period of five years at nominal interest to domestic product manufacturers having a total turnover of less than Rs 10 billion.

•  A 10-year income tax holiday for domestic telecom product manufacturers having an annual turnover of less than Rs 10 billion as well as exemption from the minimum alternate tax obligation.

•  Requirement of “provenness” to be waived for domestic product manufacturers having an annual turnover of less than Rs 10 billion for products certified to be IPs/IMPs by the test and certification organisation.

•  Export of domestic products should be actively encouraged and telecom included in grant-in-aid programmes and bilateral trade agreements.

• Taxes and duties on individual components should be lower than those levied on finished products.

•  Dual-use imported inputs required for telecom equipment manufacture should not be subject to bond payment.

Besides the aforementioned incentives for domestically manufactured products, other special measures are also being proposed for promoting Indian products.

To actively promote research and development (R&D) and create IPRs, TRAI has proposed the following:

•  Focus areas to be identified for R&D so that resources are efficiently utilised.

• The target of R&D will be to develop IPRs and commercial products that can meet the demand for equipment.

•  Setting up a Telecom Research and Development Corporation at an investment of Rs 150 billion.

• Of the above sum, Rs 100 billion would be a corpus, the interest from which will be used to fund research activities by way of soft loans, grants, reimbursement of R&D expenses and IPR fees.

• A telecom R&D park to be established within two years with a fund of Rs 50 billion, with the objective of carrying out on-site R&D.

According to the telecom regulator, India has not been active in driving global standards and consequently, does not have many IPRs in the current technologies. The setting up of a Telecom Standards Organisation has been recommended for carrying out all works related to telecom standards, driving international standards and drawing up specifications of the equipment to be used in Indian telecom networks, including security standards.

The regulator has also recommended the identification of 10 telecom manufacturing clusters to promote TEM, and remove infrastructural disabilities in these clusters in a time-bound manner.

Semiconductor chips are important constituents of all telecom equipment. The Indian market for semiconductor chips is around $8 billion. Semiconductors account for 30-60 per cent of the total value of the bill of materials. India designs a large number of chips for other countries but does not manufacture chips based on its own designs. Semiconductor fabrication facilities will, therefore, become economically important, as there is a GDP multiplier effect of about 22 times for the amount invested in semiconductor R&D and manufacturing. As a result, TRAI has recommended the setting up of two fabrication units with the government’s assistance.

The proposed telecom Equipment Manufacturing Policy is expected to result in the following major benefits:

• It will provide the necessary stimulus to the struggling domestic telecom equipment industry. The industry would be put on a high-growth path and eventually pay back rich dividends in terms of increased production, value addition and exports.

•  The industry would be geared up to meet the demand for 5 billion connected devices by end-2020.

•   Increased production will result in increased contribution of telecom manufacturing to the GDP.

•  The policy will result in increased earning of foreign exchange from exports.

•   Increased R&D and manufacturing would lead to improved supply of domestic telecom equipment to strategic sectors like defence and space.

•  Increased local manufacturing would mitigate strategic security concerns that come with imported equipment.

•  Technological skills of the available manpower will be enhanced through training and experience.

•   The increase in production will generate employment for many people of different skill sets and educational backgrounds.

TRAI expects that India will not only achieve greater self-reliance but also become an important source of new technology equipment.

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