India now has one of the most competitive telecom services and this has positive implications in reducing communications costs for the outsourcing industry even when other factor prices have been rising. India?s trade imbalance is rising in the telecom equipment segment, thanks to a weak manufacturing base to support the phenomenal growth of new subscribers and the substantial import of telecom equipment.

Ironically, telecom equipment production was among the first manufacturing industries India had sought to develop through explicit state participation right after Independence. Though the government even attempted to craft a sectoral system of innovation in the telecom equipment industry, none of the efforts helped build a successful manufacturing hub.

However, in a recent working paper, Sunil Mani, a professor at the Centre for Development Studies, argues that the growth of market for telecom equipment, precipitated by the growth of services, has jump-started an extremely dynamic manufacturing industry, especially over the last five years. The dynamism of the industry is evident in that for the first time India has a positive trade balance in mobile handsets, facilitated by the emergence of a manufacturing and export base for cheaper handsets.

The study points out the Indian telecommunications industry is a unique example of a services industry leading to the growth and emergence of a manufacturing industry. So it appears that growth in services is now finally leading to domestic manufacturing of equipment.

Although the industry is still dominated by MNCs, domestic firms have started getting into manufacturing and innovations as well. However, there is some evidence to show that most manufacturers are now more of assemblers of imported parts than manufacturers per se, but there is hope for gains on this front, points out the paper, which attempts to trace the performance of India?s telecom services industry and then analyse its impact, potential as well actual, on the equipment manufacturing industry. In the process, the paper identifies areas where policy measures still have a role to improve the working of the industry.

India?s telecommunications industry comprises two distinct sectors: manufacturing of telecom equipment and distribution of telecom services. The industry now accounts for about 3% of India?s GDP, is a vital contributor to India?s ICT industry and has important linkage effects with the rest of the economy. It is also very employment-intensive and according to CSO (2010), out of the total 3.15 million persons employed in India?s ICT industry in 2006-07, almost 2.52 million or so were employed in telecom services. In other words, about 80% of those employed in the ICT sector is to found in the distribution of telecom services industry.

In 1991, India had a total of just 5 million telephones. By October of 2010, this has grown to 742 million. This large increase in the number of mobile handsets has strong positive implications for the telecom equipment industry and specifically the mobile handsets industry.

A huge domestic market for telecom equipment has suddenly emerged, spawning the creation of a significant manufacturing base. Chennai has become a thriving cluster for mobile handsets manufacturing and this has implications for the downstream industries such as the semiconductor industry.

Delineating three broad phases of government intervention in the telecom equipment industry, the study notes that it is only in the third phase, since 1991, that the growth of the equipment sector gained momentum. Initially the demand for equipment was mainly met by imports. This was because that the domestic manufacturing industry and indeed the sectoral system of innovation that the state had built up over time focused almost entirely on the fixed line technology. Over time the the monthly demand for telecom equipment in India became almost three or five times the annual demand for such equipment in countries such as Finland, South Korea and the United States, homes to some of the largest mobile handset manufacturers in the world.

Slowly most MNCs have built domestic manufacturing capacities in India, and later by a host of domestic manufacturers. As domestic production increased, the import dependence of the country decreased dramatically. Simultaneously exports of telecom equipment have started to increase, and it appears that India is now on the sure path to becoming a manufacturing hub of telecom equipment.

Estimating the net self-sufficiency rate (SSR) for India?s telecom equipment industry, by defining the ratio of domestic production to total availability, during four time points: 1992-93; 1997-98; 2002-03; and 2008-09, the paper notes that the SSR showed a declining trend and reached the lowest point of about 50 in 2002-03 when the domestic demand for telecom equipment had really started exploding. Since then, there has been a dramatic increase in the domestic manufacture of telecom equipment.

Telecom equipment output growth, although showing fluctuations, has started registering high growth rates from 2006-07. This was soon accompanied by growing exports from the country. In fact, by 2008-09, export intensity has increased to almost 23%. Thus, within a short span, India has become a gross exporter of telecom equipment. Data on disaggregated export categories are hard to come by. Also, most of the recent classifications of export data are not disaggregated enough to identify the exports of, say, mobile handsets. The only exception to this the classification is HS 2007 under the UN Commodity Trade Statistics (UN COMTRADE), which clearly identifies mobile handsets. This data, which is available only for 2009, shows that India has become a net exporter of mobile handsets.

In fact mobile handsets alone constitute a lion?s share of telecom equipment exports from the country. Of course some highly priced and technologically sophisticated phones such as smart phones are perhaps imported as well.

Field inquiries show that most MNCs are considering India as a hub for manufacturing of cheaper handsets, and within India, Chennai has become a telecom equipment cluster with Nokia as the hanger firm in this cluster.

While Nokia and Nokia Siemens Networks have set up their manufacturing plant in Chennai, Ericsson has set up GSM radio base station manufacturing facility in Jaipur. Motorola and Foxconn (OEM) have set up large manufacturing plants in Chennai. Elcoteq has set up handset manufacturing facilities in Bangalore. LG Electronics has set up a GSM phone manufacturing plant near Pune. Ericsson has launched its R&D Centre in Chennai. Flextronics has set up an SEZ in Chennai. A large number of companies like Alcatel and Cisco has shown interest in setting up their R&D centres in India.

Apart from the MNCs, a number of Indian manufacturers have sprung up. Micromax, Spice, Karbonn, Lava, Lemon and Max are the Indian manufacturers of mobile handsets. Of late, a leading service provider, Bharti, is also entering the manufacturing sector.

However, most of these local manufacturers are mere assemblers, with much of the components are imported, especially from China. But indications are that this is bound to change very soon in favour of local manufacturing.