Fault-lines in telecom PLI scheme

Smitha Francis | Updated on September 17, 2021

The expansion envisaged in India-made telecom/network products will drain forex

While announcing major policy changes for the telecom services sector, the IT & Telecom Minister reiterated the Prime Minister’s mandate that core telecom equipment and networks need to be designed and manufactured in India. It is strange that any such emphasis is totally lacking in the present architecture of the production-linked incentive (PLI) scheme for telecom equipment and networks launched by the Department of Telecommunications (DoT).

Similar to the electronics PLI, the stated aim is to boost local production of telecom equipment for reducing India’s import dependence, by making India “a robust manufacturing hub” for them. Eligible products include broadband transmission equipment, 4G/5G next generation radio access network and wireless equipment, routers, IoT access devices, etc.

Reports suggest that the government is likely to approve 33 out of the 36 applications made under this ₹12,195-crore scheme. While the scheme has been touted as a ‘signal boost’ and a ‘game-changer’ by some observers, will its present design help India to achieve the stated objectives?

The scheme guidelines initially specified that eligibility was subject to minimum threshold on ‘global manufacturing revenue’ of applicants in the electronics, telecom and networking segments. But soon after, this qualification criterion was modified to be based on ‘global revenue’ (instead of ‘global manufacturing revenue’). Thus IT/ITES, including software, was added to the electronics, telecom and networking segments for revenue calculation.

While this might have been done to include particular companies, it indirectly acknowledged the fact that telecom and networking products are as integrally linked with software, as electronics. Not only for 5G, but even the increasing digitalisation of existing 4G networks employ software-defined network solutions. It is therefore ironic that the scheme’s architecture only envisages manufacturing of ‘goods’, and software is not covered under the specified list of telecom and networking ‘products’.

The same DoT that notified this PLI scheme, had, in its August 2018 Public Procurement (Preference for Make in India) Order (2017), had described hardware design and software design & development among the main inputs/stages in telecom manufacturing. This notification also specified the conditions for these inputs to be qualified: (i) the IPR resides in India for the hardware design; and (ii) the copyright for the software design and development is in India.

The architects of the telecom PPP-MII Order must be credited for integrating into policy formulation, what several empirical studies on value chain dynamics have established — that the largest profit share within value chains lie in product development, which means the software and hardware product design. Thus the design of that PPP-MII order would create immense synergies between the high value added segments of hardware and software design domestically.

It speaks volumes about the political economy of this MNC-dominated sector that through an amendment on August 31, the DoT removed the need for any domestic IPR or Indian technology requirement. The same MNC-tied interests have succeeded in ensuring that the PLI scheme’s design of incentives lack the direly needed policy thrust on nationally patented R&D-intensive manufacturing (rather than assembled products).

In the PLI guidelines, DoT’s commitment to promote national telecom R&D capabilities appears limited to Clause 5.5: “All manufacturers with products backed by Indian technologies are encouraged to apply”.

Meanwhile, out of the 10 applications to be approved in the non-MSME category, minimum number set for the promotion of ‘domestic companies’ is just three (and just 8 per cent of the total scheme amount is allocated for MSMEs). In fact, the scheme appears to create perverse incentives for in-house R&D-intensive production by capping R&D expenditure eligible to be counted under incremental investments at 15 per cent of the total committed investment. The fact that expansion in domestic electronics and telecom “manufacturing” has continued to be disconnected from nationally owned product development is precisely what has driven large foreign exchange outflows from many foreign and domestic electronics/telecom firms.

Going beyond imports, this drain to developed country lead firms (or their related parties) which own the product design patents, has been happening in the form of royalties and other technology payments for software, “IT consultancy”, “technical assistance”, etc.

In the era of intelligent/smart equipment needed for what the industry refers to as “virtualisation of networks”, new product development will happen on top of the intelligence derived from data obtained through network devices and equipment. Data analytics will thus play a critical role in the design stage itself, for bringing new products with more intelligent functions to the market.

This requires software-embedded hardware, which enable real-time data transfer. Such data include network infrastructural and operational parameters, as well as transaction data and end user data. Even as we await our regulatory frameworks for personal and non-personal data, foreign firms have been “benefiting” from de facto control over data in whichever sector they are in, giving them first-mover advantage in IoT, edge computing, AI, etc.

Need for policy catch-up

Therefore, India can no longer hope to reduce foreign dependence in this digital infrastructure layer critical to national security, just by promoting ‘manufacturing of goods’. The forex outflows will reduce only when product designs (including software/algorithms) using Indian data, are nationally owned.

Policies must also signal support for co-investment business strategies, which create invaluable synergies between national technological capabilities across activities. Expanding the portfolio of nationally owned technologies and products in this manner can increase domestic value addition dramatically.

Again, there is a recent precedent. In BSNL’s tender for upgradation of 3G networks to 4G, if an individual domestic equipment maker found itself non-eligible under financial qualification criteria, there was an option for firms to apply as a consortium. Reports now suggest that the tender may be awarded to the consortium formed between the public sector telecom R&D firm, C-DoT, along with the software giant, TCS, and the domestic telecom equipment maker, Tejas Networks.

Such an incentive architecture together with the adoption of national technical standards, which would nudge domestic and foreign telecom companies to forge alliances with indigenous firms with nationally owned technology assets, has also been given a total miss in the PLI scheme.

In its present avatar, the telecom PLI scheme has no component to ensure that the expansion in the output of “India-made” telecom and network products that will ensue, will not push the nation deeper into forex draining dependencies.

The writer is an economist based in

New Delhi

Published on September 16, 2021

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