Driven by the huge uptake of wireless services, the mobile handset manufacturing industry in India has grown at a rapid pace over the past five years. However, the same does not hold true for the Indian telecom equipment manufacturing industry, which has seen limited activity due to several challenges. Between 2012 and 2016, the country’s import bill for telecom equipment increased at a rate of 16.3 per cent annually while exports have declined at an annual rate of 17.98 per cent. The limited domestic production capability of the industry not only poses a serious challenge to the sector’s economic growth, but also raises security concerns arising from the excessive reliance on foreign manufactured products. Of late, the sector has been flooded with low-cost Chinese equipment. On a broader level, a small local manufacturing base takes India a step back in achieving self-sufficiency in telecom equipment manufacturing.
In December 2010, the Telecom Regulatory Authority of India (TRAI) had floated a consultation paper, “Encouraging Telecom Manufacturing in India”. In April 2011, recommendations on the Telecom Equipment Manufacturing Policy were published and forwarded to the Department of Telecommunications (DoT). However, the impact of the policy over the last five years has been limited. On the other hand, the Indian telecom space has evolved considerably in terms of technology standards during this period. The industry has transitioned from 3G to 4G in a short span and is now looking to implement 5G soon.
In the evolving technology landscape, there is a need to relook at the existing local manufacturing capacity of the telecom sector and address the issues impeding its growth. To this end, TRAI has recently released a consultation paper, “Promoting Local Telecom Equipment Manufacturing”, to realistically assess the country’s manufacturing potential and arrive at recommendations that would enable the telecom industry to emerge as a global manufacturing hub.
TRAI has invited stakeholder comments on the policy measures needed to boost innovation and productivity in local telecom manufacturing. A look at the key issues discussed in the consultation paper…
IPRs
There are several intellectual property rights (IPR) issues concerning the Indian telecom manufacturing sector. First, there are not many IPRs generated in the segment due to the poor state of innovation. Since Indian telecom manufacturers do not hold IPRs, they have to incur higher expenditures on royalty payments, which ultimately increase the price of locally manufactured telecom equipment. Second, there is no single-window licensing mechanism in place that can provide clarity on patent licensing requirements at the time of commencement of manufacturing activities. Moreover, the rate of royalty differs substantially from one potential licensee to another, resulting in higher costs for local manufacturers. The calculation of royalty on a fair, reasonable and non-discriminatory (FRAND) basis remains a challenge and is the bone of contention in the ongoing standard essential patent disputes.
To address these issues, TRAI has sought stakeholder comments on whether the existing patent laws in India are sufficient and, if not, what measures can be adopted to make them more effective. Stakeholders have also been asked to suggest a dispute resolution mechanism for the determination of royalty distribution on a FRAND basis.
Standardisation, certification and testing
The majority of telecom products used across international markets are based on global standards. Harmonisation of these global standards to work across local networks is critical. India being a large market for such products, it is necessary that the country’s local needs are incorporated in the standards. Also, the certification of telecom equipment is critical. The Tele-communication Engineering Centre published the draft “Procedure for Certification of Telecommunication Equipment” in May 2017. Once finalised, this will address the issues pertaining to the certification of telecom equipment to a large extent.
TRAI has sought stakeholder comments on the shortcomings of the existing mechanism of standardisation, certification and testing of telecom equipment to support local telecom manufacturing, and suggestions for its improvement.
The government, through its successive national telecom policies, has tried to create a conducive environment for telecom equipment manufacturing in India.
Fiscal incentives
The government, through its successive national telecom policies, has tried to create a conducive environment for telecom equipment manufacturing in India. The National Telecom Policy, 2012, promoted research and development (R&D), telecom equipment manufacturing, and standardisation of telecom equipment. A key fiscal incentive was introduced in the form of the Modified Special Incentive Package Scheme (M-SIPS) in July 2012. The scheme provides incentives on a reimbursement basis for investment in capital expenditure – that is, 20 per cent is reimbursed for investments in special economic zones (SEZs) and 25 per cent in non-SEZs. It also provides for reimbursement of countervailing duty/excise for capital equipment for non-SEZ units. As of end-June 2017, 97 M-SIPS applications worth Rs 208 billion have been approved and 134 worth Rs 1,224 billion are under process. Further, 12 proposals worth Rs 7.84 billion have been recommended by the appraisal committee and are awaiting approval. Furthermore, 124 applications worth Rs 1,035 billion are under appraisal, while incentives have been disbursed for four applications worth Rs 409 million.
The government has also established a single electronic development fund (EDF) to meet the R&D requirements. The EDF has been set up as a “fund of funds” to participate in daughter funds, which will provide risk capital to companies developing new technologies in the areas of electronics, nanoelectronics and IT. So far, 22 daughter funds have been selected for investment through the EDF. The cumulative commitment of the EDF in June 2017 was Rs 12.27 billion.
Recently, goods and service tax (GST) has been imposed on mobile phones. Under the new rule, all locally manufactured phones have become costlier while imported phones have become cheaper as they were attracting higher taxes pre-GST. Further, the government has set up eight Telecom Centres of Excellence (TCOEs) in public-private partnership. These TCOEs have been created to promote the development of new technologies, generate IPRs, incubate innovations and promote entrepreneurship to position India as a global leader in telecom innovation and a hub of telecom equipment manufacturing.
TRAI has sought stakeholder comments on existing fiscal incentives to promote local telecom manufacturing, and suggestions for changes.
Issues under ITA
India is a part of the World Trade Organization’s (WTO) Information Technology Agreement (ITA)-1, under which 217 tariff lines have been brought under zero duty since 2005. This has led to a surge in imports, thus impacting domestic manufacturing. Further, the WTO has been strongly advocating including several more items like base stations to the existing list under the ITA-2, which was signed in 2015 by 24 member countries. While India has taken a stand not to sign ITA-2, the global increase in demand for telecom products driven by ITA expansion could boost Chinese exports of telecom goods by as much as $12 billion annually. TRAI has sought stakeholder views on the issues under the ITA that need to be addressed to make local telecom manufacturing more competitive and robust.
PMA policy
In a bid to encourage local manufacturers, the government had promulgated the Preferential Market Access (PMA) policy to provide preference to domestically manufactured telecom products in government procurement. The value addition criterion for preferential market access of domestically manufactured telecom products was also notified by DoT. Further, the government has recently issued the Public Procurement Order, 2017 to encourage “make in India” products with a view to increase income and employment. TRAI has sought stakeholder comments on the existing PMA policy and suggestions for any changes.
Conclusion
TRAI’s consultation paper comes at a time when the country is gearing up for significant action in the telecom space driven by programmes like Digital India and the Smart Cities Mission, the growing uptake of machine-to-machine and internet-of-things technologies, and the deployment of 5G. Right policy guidance and regulatory intervention is the need of the hour to revive the domestic telecom equipment manufacturing segment.
