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.

Funding requirements

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

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