The Digital India initiative, as well as the development of telecom infrastructure and provision of internet connectivity, are dependent on the easy availability of reliable and affordable telecom and networking equipment. In light of this, it is crucial to promote domestic manufacturing and reduce imports. Growing concerns about digital security and the “China Plus One” concept of diversifying value chains are also driving India’s domestic telecom and network equipment manufacturing.

One key policy instrument has been the production-linked incentive (PLI) scheme for telecom and networking equipment. The scheme was initially released with an outlay of Rs 121.95 billion for a tenure of five years (2021-22 to 2025-26), with effect from April 1, 2021. The PLI scheme covers switches, routers, 4G/5G radio access network (RAN), wireless equipment, customer premises equipment (CPE) and internet of things (IoT) devices. It was later extended by one year, with incentives in the range of 4-7 per cent for different categories. The list has been expanded to include open RAN equipment, RAN controllers, satellite CPEs and modules of IoT/machine-to-machine devices. The Department of Telecommunications also raised the incentive rate by an additional 1 per cent.

As of December 31, 2023, investments of Rs 29.63 billion have been allocated under the PLI scheme. It has generated 16,106 new jobs out of an estimated 44,494. The Reserve Bank of India’s annual report indicates that the PLI schemes and the policy focus on high-tech manufacturing have started to make a visible difference. Sectors such as electronics manufacturing and semiconductor fabrication are scaling up in size,  manufacturing and research and development (R&D) capacity, and widening in scope.

The interim Union Budget 2024-25, which allocated Rs 269.03 billion for semiconductor and display fabrication, will contribute to the momentum in this space. In turn, as ecosystems develop around electronics manufacturing, new employment opportunities should emerge and overall, a there should be positive effect on macro domestic demand.

The National Quantum Mission, approved with a cost of Rs 260 billion, over the period 2023-24 to 2030-31, will boost scientific and industrial R&D in quantum technology. Assuming breakthroughs in terms of developing scientific understanding and industrial capacities, this will create beneficial knock-on effects for the Digital India policy. In the medium term, this will lead to productivity growth, boosting India’s GDP growth potential.

“The PLI scheme has helped domestic electronics units establish a foothold, and they can now start scaling the ladder in terms of sophistication. ”

The Ministry of Commerce and Industry (MCI) highlights that an increasing number of electronics components are now being made domestically, leading to a sharp decline in component imports, in terms of both value and volume. Imports of completely boxed units, such as smartphones, reduced by 40 per cent during April 2023-January 2024 as indigenisation gained traction.

Local manufacturing of smartphones rose 5 per cent year on year in 2023, driven by the PLI scheme, with more components being produced locally. The imports of plastic parts, including back covers, GSM antennae and camera lenses, dropped by 33 per cent by volume to 11,305.93 kg in the first ten months of FY 2024 from 17,037.16 kg in the same period of FY 2023. In terms of value, imports fell 26.5 per cent during this period.  Similarly, imports of mechanical parts, such as vibrator motors, screws and sockets, reduced 4 per cent by volume and 1.6 per cent by value. These categories of components received a reduction in import duty from 15 per cent to 10 per cent in the interim budget. The imports of chargers/adapters for mobile phones and other electronic devices saw a 72 per cent fall in volumes in the April 2023 to January 2024 period compared to the same period in FY 2023, but import value increased 1.3 per cent year on year.

Imports of camera modules, which account for 10 per cent of the bill of material (BoM), rose 2.3 per cent in volume but fell 5.3 per cent in value, while battery packs (which account for around 6 per cent of the BoM) increased 12 per cent by volume and fell 13 per cent in value. The MCI data also showed a 200 per cent rise in display assembly imports, which could be attributed to changes in the harmonised system nomenclature code for traded items, which was revised in 2023.

Semiconductor imports rose by 0.5 per cent in volume and 20 per cent in value to $12,255 million in FY 2024 (April 2023–January 2024) due to the import of high-end semiconductors for premium electronic goods and higher cost of wafers.

In the first three quarters of FY 2024 (April to December 2023), India’s electronics exports grew 22.24 per cent to cross the $20 billion mark. This was driven primarily by smartphone exports by Apple and Samsung. iPhones accounted for $7 billion worth of exports, which was 35 per cent by value.

It is estimated that an import substitution of about 60 per cent has been achieved in the telecom sector as India nears self-reliance in antennae, gigabit passive optical network and CPE. Around 80 per cent of telecom equipment used in 5G roll-outs is locally manufactured. The 5G deployment involves about 20 companies, including Nokia, Jabil, Sanmina, HFCL Limited, VVDN Technologies and Tejas Networks, supplying to Bharti Airtel and Reliance Jio. These companies have reportedly met their FY 2023 PLI targets as a result, making them eligible for incentives amounting to Rs 4 billion.

“It is estimated that an import substitution of about 60 per cent has been achieved in the telecom sector as India nears self-reliance in antennae, gigabit passive optical network and CPE. Around 80 per cent of telecom equipment used in 5G roll-outs is locally manufactured.”

This is encouraging; however, India’s contribution to the global telecom equipment market is less than 2 per cent. Exports of telecom equipment primarily consist of optical fibre cables, printed circuit boards, telephonic/telegraphic apparatus and integrated services digital network equipment. The share of equipment for RAN, IP networks, core networks and optical networks is minimal.

Experts argue the majority of domestic manufacturers focus primarily on assembly. A critical drawback of the PLI scheme may be that the subsidy is provided for assembling phones without taking value added into account. Consequently, there is little value-add in handset exports while there has been a surge in the import of related components. This highlights a reliance on imports, which is detrimental to the development of more extensive domestic manufacturing. A modification in the incentives could help change this situation.

Another key issue is the higher unit cost of domestic manufacturing due to a complex, multi-step process. Imports of components, machines and specialty chemicals involve substantial upfront payments, along with customs duties, freight, insurance and other charges. This raises relative costs, and the industry is further hampered by a lack of access to capital and advanced infrastructure for high-precision industries. Tighter local supply chains with smoother import/export processes are also required, as current inefficiencies hamper access to components, leading to long lead times and liquidity issues.

Holistic changes are required to further develop the ecosystem. That said, the PLI scheme has, no doubt, helped domestic electronics units establish a foothold and they can now start scaling the ladder in terms of sophistication.

The past four years have also highlighted areas where further policy attention is required to create a robust domestic manufacturing ecosystem. Sustained efforts to plug those gaps and to promote local R&D could help India emerge as a significant player in the global telecommunications equipment market while meeting the needs of its own massive domestic market.

Devangshu Datta