The rapid growth in data users and upcoming technologies such as 5G, internet of things and machine-to-machine communication is likely to fuel expansion in the networking and telecom equipment manufacturing (NATEM) market. This provides tremendous opportunities for NATEM companies to grow into global players. An agile manufacturing set-up for networking and telecom equipment is important for adding value to the economy. As envisaged in the National Digital Communications Policy, 2018, if India’s contribution to global value chains is to be maximised by focusing on domestic production, increasing exports and reducing the import burden, several policy initiatives need to be taken.
Accordingly, the Telecom Regulatory Authority of India (TRAI) has issued a consultation paper to seek stakeholders’ views on the existing concerns of the NATEM segment. TRAI intends to further examine the measures that should be taken to meet the demands of the growing market, both within the country and outside. It also intends to solicit views on the measures required for transforming the telecom manufacturing landscape and establishing the country as an export hub.
A look at key issues highlighted in the consultation paper…
PLI scheme for NATEM and its adequacy
The production-linked incentive (PLI) scheme has been launched by the Department of Telecommunications with the objective of boosting domestic NATEM by incentivising incremental investments and turnovers with a total outlay of Rs 121.95 billion. While the PLI scheme is a big step towards promoting local NATEM, it can also be argued that a single scheme is not enough as it may not cover all the requirements of the industry.
As per TRAI, several parallel initiatives need to be taken including promoting research and development (R&D), providing funds for R&D; developing R&D parks, putting in place mechanisms to develop skill sets, promoting incubation centres, addressing issues related to testing and certification, and addressing ease of doing business issues including expediting clearances and reviewing compliance requirements.
The PLI scheme is based on investment thresholds and increase in net sales. This may not serve the needs of start-ups looking for seed funding or companies that are at the expansion stage or in the R&D space. In this regard, TRAI has asked stakeholders whether the PLI scheme in its current form is adequate to address the needs of NATEM or any amendments or extensions are needed to make it more effective.
Setting up of the Electronics Development Fund (EDF) is an important strategy for enabling a vibrant ecosystem of innovation and R&D. It is a venture capital fund in the nature of a “fund of funds” that participates in professionally managed daughter funds, which, in turn, provide risk capital to companies developing new technologies. However, the EDF does not have an exclusive focus on the telecom sector and may not be sufficient to take care of the venture funding required for promoting NATEM in India.
Instead, the NATEM ecosystem requires a streamlined focus and specific funding to become competitive. Further, as 5G and futuristic technology infrastructure is going to be largely software-driven, a separate fund for the development of telecom-related software can also be conceptualised for the overall growth of the telecom and networking product ecosystem.
In this regard, TRAI has asked stakeholders for their inputs on whether EDF meets the requirements of promoting NATEM in India; its limitations with respect to the NATEM sector and how its scope can be enhanced; the need for creation of separate funds on the lines of the EDF and institutional mechanisms to be put in place to govern the fund(s); and additional measures for promoting and supporting the start-up ecosystem in the telecom sector in India.
Project financing refers to funding of long-term projects, through a specific financial structure. In the telecom sector, some of the Universal Service Obligation Fund-initiated projects can fall under this category, where telecom service providers (TSPs) or their consortiums can opt for the project financing mode. The development of telecom infrastructure requires favourable investment support through innovative project financing schemes.
To this end, TRAI has asked stakeholders which of the financial instruments related to project financing, contract financing and credit default insurance currently available in India they are using and to what extent; whether these financing instruments are able to cater to the needs of NATEM in India; how these instruments can be further improved; and what new instruments can cater to NATEM’s needs in India.
Capex and interest subvention schemes
Capital-linked incentives or incentives linked to capex are extremely crucial for industries to strengthen their presence in the market at the very beginning. Especially for NATEM, where the capex cost is historically high, incentive schemes for the initial capital can improve the strategic position and fuel market growth for industries. Under the interest subvention scheme, a subsidy or rebate in the interest rate on loans is extended by financial institutions and subsidy is borne by the government to promote the industry. Hence, TRAI has asked stakeholders whether existing schemes relating to capex and interest subvention are meeting NATEM’s requirement for finance in India.
Specific schemes for supporting MSMEs in NATEM
Micro, small and medium enterprises (MSMEs) are considered to be the backbone of the manufacturing sector in the country. There are various growth opportunities for MSMEs in telecommunications. However, their integration with the digital economy and the telecom sector has been low.
Various schemes are already available for MSMEs, which should also benefit companies in NATEM. However, there is a need to examine whether existing schemes have actually been effective for telecom-specific manufacturing/financing requirements, or a dedicated scheme is required for the same. To this end, TRAI has sought stakeholders’ views on whether existing financial assistance schemes for MSMEs that are in NATEM are sufficiently catering to their requirements or a separate dedicated scheme is required for the sector.
Cost disabilities for manufacturing in India
Indian manufacturers reportedly have a local cost disadvantage compared to countries such as China, Vietnam and Thailand. Given the limited profit margins of domestic manufacturers of NATEM, cost disabilities impact the overall business viability for them. India currently suffers a cost disability of 7.52-9.8 per cent vis-à-vis Vietnam and 17.32-19 per cent vis-à-vis China for the manufacturing of these products locally. The cost disability in India in terms of capital, power, labour, logistics and other infrastructure is higher by 10-20 per cent, in comparison with developed countries. To this end, TRAI has asked stakeholders if any cost disadvantage is experienced by domestic NATEM companies as compared to their global counterparts due to various limitations and what the percentage cost disadvantage for domestic NATEM is vis-à-vis other countries.
PMA/PMI incentives to domestically manufactured products
Merely the creation of a domestic manufacturing industry in India is not sufficient, as manufacturers need a sustainable market to remain relevant. The government’s support for products that are made in India can help create a sustained market pull for such products. The preferential market access (PMA) scheme is a concerted effort by the government to achieve the same. TRAI has prescribed incentives and penalties for implementing the scheme. Further, the preference to make in India (PMI) scheme describes hardware and software design and development among the main inputs/stages in the telecom manufacturing. However, TRAI has sought stakeholders’ views on whether the PMA and PMI schemes in their current form are comprehensive for promoting NATEM, how the challenges associated with the implementation for PMA and PMI can be addressed, and how incentives to TSPs to deploy indigenously manufactured products in their networks will be helpful in promoting NATEM in India.
Kuhu Singh Abbhi