The Telecom Regulatory Authority of India (Trai), with reason, is concerned that every little bit of the equipment deployed in the country?s telecom network or handsets used by consumers are developed or manufactured locally. Manufacturing would create jobs and cheaper local equipment could lower costs of expanding sparse rural and broadband networks. Given telecom?s imminent role in priority sectors like education, health, banking and governance, it would be strategic for India to target a more pervasive role in the telecom ecosystem. India?s impressive performance in expanding telecom services across the country pales when compared to its poor showing in manufacturing. Trai is right to urge action. However, do its proposals stand up to scrutiny?
The Trai?s chief proposal, in its recent recommendations to the government to expand use of locally manufactured telecom equipment, is for operators to provide preferential market access to locally manufactured products. Trai wants the share of domestic manufactured products (DMP) to be increased to 30% by next year and to 80% in 2019. Trai rightly breaks up DMP into two parts?Indian manufactured products (IMP would include Nokia making products in India) and Indian products (IP) where intellectual property rests with Indians. Trai has also laid down the minimum level of value added in India for a product to qualify as Indian.
Trai proposes a Telecom Research and Development Fund, with seed funding of R15,000 crore. It wants a 5-year holiday from levies and taxes on local manufacture since imported IT products do not attract them after India signed WTO?s Information Technology Agreement, 1996. Trai is right to advocate greater support for R&D and relief for companies facing unfair duties. But its core recommendation of preferential market access for local companies is flawed, even if well-meant. Trai confuses two separate, even defensible, goals: the need to ensure the equipment market is competitive and helping Indian players win. The former is a natural goal for an economic regulator. The latter involves several assumptions of a political kind and is dangerous ground for subject specialist regulators.
This is not to suggest that local manufacturing is out-of-bounds for a regulator. Trai is competent to answer why operators and users avoid products manufactured in India. Are foreign players abusing the market? Is there truth in the repeated allegations that Chinese companies are undercutting competitors with the help of cheap funds from their government? Affected Indian companies are best placed to highlight anti-competitive practices. Do they make comparable products of acceptable quality in sufficient numbers? Are there concerns about post-sales support? Are players playing the ?India card? to corner huge contracts from the soon to-be-finalised and ambitious National Broadband Plan?
The answers to these questions are neither obvious nor easy, but Trai is competent to explore them. It may be a difficult exercise but presuming results and making arbitrary recommendations cannot be a substitute. Trai?s approach is to list different arguments but rarely justify them with rigour. How did Trai choose the numbers in the accompanying table? What led Trai to discount the arguments that interfering in operators? choice of equipment could distort markets? Would it not make more sense to focus on making Indian products more competitive in the market place by helping their producers to lower costs of inputs like land, utilities etc? Cheaper finance, support in marketing and other measures could help Indian companies. A reward to companies for buying Indian might make sense. But stiff penalties for not doing so are intrusive and perhaps damaging, if Indian producers escape competition.
Trai projects India will control IPRs for about 25% of the telecom equipment deployed in its market in 3 years and 50% in 8 years. This seems to ignore that the journey of a typical telecom technology or product from the laboratory to the market is much slower, especially since testing, standardisation and certification by appropriate authorities takes years.
Trai does require that companies deploy domestically manufactured products, only if their quality and price can justify the choice. But its contention that the product be ?proven? should apply only to Indian companies with revenues lower than R1,000 crore is counter-productive. Are smaller companies better able to realise India?s legitimate aspirations in manufacturing when Trai itself says elsewhere that scale is an important parameter for commercial viability in manufacturing? What happens if only one Indian company has a relevant product? Why is it acceptable that Indian operators ignore competing foreign products in the market and choose an untried Indian product? Few would accept such an argument even for cars or TVs, leave aside for critical infrastructure. Trai?s recommendations show little robust engagement with relevant issues and risks.
The author is a senior telecom consultant