The growing penetration of smartphones, enhanced internet accessibility and the ever-rising consumption of data have led to a significant increase in the need for cost-effective networking and telecommunications equipment in India. However, the Indian industry currently depends primarily on imported equipment to fulfil its networking and telecom equipment requirements. Moreover, India’s share in the global telecom equipment market remains abysmally low at around 1.5 per cent. The export of telecom equipment predominantly comprises items such as optical fibre cables and printed circuit boards, while the proportion of equipment associated with radio access networks, IP networks, core networks and optical networks supporting 4G and 5G technologies is currently minimal in the overall export portfolio.

Given the vulnerability of supply chains in an increasingly uncertain world marked by geopolitical challenges, there is an urgent need to establish a strong manufacturing ecosystem for networking and telecom equipment within the country. In addition to making substantial contributions to the nation’s economy and employment, a thriving manufacturing sector will strategically position India as a key player in the global electronics and telecom equipment value chain through increased exports. The creation of a domestic ecosystem will also help foster intricate linkages, both forward and backwards, thereby stimulating demand for various electronic components. Over the long term, this will help cultivate technical expertise and skills within the country, reducing the dependence on imported telecom end products and effectively addressing concerns related to data privacy and data localisation.

In recent years, the government has implemented several policies and schemes to promote the domestic manufacturing of network and telecom equipment through financial incentives, infrastructure support and various skill development initiatives. Despite these efforts, the manufacturing ecosystem faces several challenges, with much of the manufacturing being limited to assembly. The Department for Promotion of Industry and Internal Trade reports that the value addition in mobile manufacturing in India is only around 20 per cent. Against this context, it is imperative to examine the major policy measures undertaken to promote the expansion of domestic manufacturing and identify the key deficiencies in policy support.

Government efforts to promote domestic manufacturing

The National Digital Communications Policy, 2018, is a pivotal component of the government’s policy strategy to bolster the domestic production of telecom and networking equipment in India. The policy seeks to incentivise local manufacturing by rationalising taxes, introducing phased manufacturing programmes and attracting global original equipment manufacturers to establish manufacturing bases within the country. Additionally, it emphasises preferential treatment for domestically produced products and services in government procurements through the preferential market access initiative. The government also released the national policy on software products in 2019 to foster innovation and entrepreneurship, and improve access to domestic and global markets for software products. Furthermore, the Ministry of Electronics and Information Technology has introduced policies to promote electronics system design and manufacturing, covering various electronic requirements.

In order to stimulate the localisation of mobile phone manufacturing within India, the government initiated a tariff increase on imported mobile phone components in 2016. Subsequently, in April 2018, a 20 per cent tariff was imposed on the complete import of mobile phones. In a key policy move, the government introduced the production-linked incentive (PLI) scheme in 2021 with the aim of nurturing global champions in telecom and networking products by providing substantial financial support and promoting the adoption of cutting-edge technology. Under the PLI scheme, manufacturers based in India, regardless of their ownership status (Indian or foreign-owned), receive financial incentives amounting to 6 per cent of a phone’s invoice price, with a reduction to 4 per cent in the fifth year for each additional unit produced domestically. To further encourage manufacturers to establish operations within their respective states, state governments are extending additional support through tax incentives, power concessions and subsidies on land acquisition. Covering a range of products such as switches, routers, 4G/5G radio access network equipment, wireless devices and internet of things access devices the PLI Scheme has a five-year duration with a total financial allocation of Rs 121.95 billion. The government has also introduced a similar PLI scheme for semiconductor manufacturing, seeking to reduce imports of integrated circuits and electronic components.

Green shoots, but a long way to go beyond basic assembly

Riding on government initiatives and industry efforts, there are discernible signs of improvement in the domestic manufacturing ecosystem. According to the Telecom Regulatory Authority of India, imports of networking and telecom equipment decreased from Rs 2,576.24 billion in 2018-19 to Rs 1,340.25 billion in 2022-23. Concurrently, exports of the equipment rose from Rs 223.84 billion to Rs 968.16 billion during the same period. Aside from catering to domestic consumption, approximately 46.9 million smartphone units manufactured in India were exported during 2022-23, with a total value of about Rs 887.25 billion. This translates to an average export price of approximately Rs 18,918 per smartphone unit.

Industry experts argue that the majority of domestic manufacturers still predominantly focus on assembly rather than extensive manufacturing. These experts point out a crucial drawback of the PLI scheme, emphasising that the government subsidy is solely provided for assembling a phone in the country, without taking into account the value added through the manufacturing processes. Consequently, despite the uptick in final mobile phone exports, there has been a simultaneous surge in the imports of vital components such as semiconductors, displays, cameras and batteries. As a result, the combined net exports of both final phones and components have declined from $12.7 billion in 2017 to below $21.3 billion in 2023. This signals a continuing elevated reliance on imports, thereby necessitating a closer look at the challenges that are limiting the development of an extensive domestic manufacturing telecom and network ecosystem in the country.

Key challenges impeding the growth of the domestic manufacturing ecosystem

A key obstacle limiting the expansion of domestic production is the higher unit cost of domestic manufacturing, stemming from a complex, multi-step manufacturing process. The import of raw materials, components, machines and specialty chemicals involves substantial upfront payments, coupled with customs duties and additional expenses related to freight, insurance and utilities. This relative cost disability is further amplified by the lack of access to capital and advanced infrastructure for high-precision industrial activities, placing domestic manufacturers at a disadvantage compared to players in countries with robust incentivisation programmes.

Another substantial challenge arises from the threat of disruptions in the supply chain, given that the manufacturing of telecom and networking equipment relies on production clusters spread across diverse geographical locations. Disruptions in one segment of the production chain can lead to supply interruptions in other areas. Supply chain disruptions are further exacerbated by export control measures enforced by suppliers of raw materials and machinery in some countries. Consequently, domestic firms face extended lead times, particularly for critical components such as microcontrollers, resulting in escalated production costs.

Moreover, existing trade agreements, including the Information Technology Agreement, 1996 and free trade agreements, restrict market access for domestic players by permitting the import of finished network and telecom products at reduced or zero customs duties. Additionally, domestic private players encounter challenges in accessing telecom networks for technology trials, as the preferential market access policy predominantly benefits public sector entities.

Domestic players also face multiple infrastructure-related issues, including the insufficient availability of uninterrupted utilities, inadequate support for efficient transit and logistics, and lack of a skilled workforce. In addition, private telecom operators continue to prioritise products from well-established global vendors, due to their long-standing reputation and perceived superior product quality cultivated over years of brand building. These foreign players enjoy advantages such as credit finance support in their home countries and economies of scale derived from higher global volumes, placing them at a competitive edge in pricing over domestic firms.

Outlook

The surge in demand for networking and telecommunications equipment, coupled with the low global market share, necessitates urgent measures to establish a robust domestic manufacturing ecosystem. The future trajectory of India’s domestic manufacturing ecosystem in networking and telecommunications equipment appears promising, contingent upon substantial measures from both the government and industry to mitigate the costs associated with domestic manufacturing. Establishing a comprehensive manufacturing ecosystem, extending beyond mere assembly, is crucial for future success.

Going forward, sustained efforts focusing on providing fiscal incentives to domestic manufacturers, fostering local skill development, enhancing infrastructure, aligning policies with global trends, and promoting research and development will help India to not only meet domestic demand but also emerge as a significant player in the global telecommunications equipment market.