The performance-linked incentive (PLI) scheme is part of the Atmanirbhar Bharat umbrella, with incentives designed to encourage investments in domestic manufacturing. Telecom and networking is one of the sectors covered under the PLI initiative. The sector was approved for inclusion by the cabinet in November 2020.
The details of the telecom-specific PLI were released in late February 2021, with a budgeted investment outlay of Rs 121.95 billion spread over five years (2021-22 to 2025-26). It is estimated that extending PLI to telecom could result in an incremental production of Rs 2.4 trillion over the next five years, generate direct and indirect employment for at least 40,000 individuals, and give India a stronger footing in the $100 billion telecom and networking products export market, with exports aggregating Rs 2 trillion over five years. It should also, over five years, generate tax revenues of Rs 170 billion from telecom equipment.
By November 2021, the Department of Telecommunications had approved investment proposals of 31 companies amounting to Rs 33.45 billion over the next four years under the PLI scheme for telecom and network equipment manufacturing.
The list of eligible equipment covers a wide range of telecom and networking equipment, including core transmission equipment, 4G/5G equipment, next-generation radio access network and wireless access equipment, customer premises equipment, internet of things (IoT), access devices, switches and routers. This covers most of the value chain except for optic fibre.
The 31 eligible companies include 16 micro, small and medium enterprises (MSMEs) and 15 non-MSMEs (eight domestic and seven global). The MSME category includes Coral Telecom, Elcom Innovations, Frog Cellsat, GDN Enterprises, GX India, Lekha Wireless Solutions, Panache Digilife, STL Networks, and eight others. The domestic non-MSME companies include Akashastha Technologies, Dixon Technologies, HFCL, ITI Limited, Neolync, Syrma Technology, Tejas Networks, and VVDN Technologies. The eligible global companies (or rather their Indian subsidiaries) include Commscope, Flextronics, Foxconn, Jabil Circuit, Nokia Solutions and Networks India, Rising Stars Hi-Tech, and Sanmina-SCI India.
The eligible players have committed incremental investments of Rs 33.45 billion over four years and target an incremental production of Rs 1.82 trillion. The cumulative investment target can be reached at one go, subject to an annual cumulative threshold being met.
Imports currently account for 75-85 per cent of the overall telecom equipment market, which is estimated to be worth around Rs 500 billion. Some MNCs have local subsidiaries with production facilities. But most of the equipment is sourced from East Asian countries such as China, Malaysia, South Korea and Vietnam. Hence, if this PLI works as intended, it should reduce imports to under 50 per cent at the very least. Ideally, apart from import reduction and employment creation, it should generate exports.
The selected companies will receive incentives based on incremental sales over the levels of 2019-20, which is set as the base year. The current market opportunity of around Rs 500 billion could double by the end of the period (2025-26) since the scheme coincides with interest in 5G technologies, which is expected to lead to a growth spurt once 5G networks roll out at scale.
The scheme has a minimum investment threshold of Rs 100 million for MSMEs and Rs 1 billion for non-MSME companies. In the first year, each non-MSME company has to make 20 per cent of the total committed investment of Rs 1 billion over five years. It also has to show incremental sales, which are at minimum 3x (and maximum 20x) of its investments for the first year. The PLI incentive varies from 4 per cent to 7 per cent in different categories, with a cap of 6 per cent for non-MSMEs.
Although there is plenty of interest from the private sector, the PLI may require some modifications to the stipulated timelines, and other conditions, to ensure it delivers as intended. For example, the selected companies in the equipment category have already petitioned the government to extend the time period for the PLI by a year.
The scheme began on April 1 and will last till 2025-26 (ending March 31, 2026), but since the eligible companies were selected in November 2021, they have only about four months to meet the first year’s targets. In addition, delays in the 5G spectrum auction will inevitably mean delays in 5G equipment orders. At the same time, the investment cycle in 4G is almost mature, leading to lower demand for 4G equipment.
Reports say that mobile device manufacturers have already got a one-year extension on PLI targets owing to the fact that they were selected only in October 2021. (Mobile phones fall under a different PLI category of electronics and IT hardware.) This is being cited by the selected players in the telecom category.
Apart from the 5G auction delay, public procurement rules have made market access difficult where government contracts are concerned. The public procurement policy, which gives preference to Make in India, has a requirement of value addition of 50 per cent in domestic manufacturing to be eligible as Class 1 suppliers for government contracts, and 20 per cent to be eligible as Class 2 suppliers. But at the moment, due to the high levels of component imports (75-85 per cent of value as mentioned above), most global non-MSMEs cannot meet even the more modest 20 per cent value addition targets. Hence, the sales targets are very likely to be missed for the first year.
As always, issues such as land acquisition and lack of access to adequate infrastructure must be addressed for successful implementation. The government also needs to ensure that there is a progressively higher value addition of the items that are eligible.
Ideally, there should be more scope for the promotion of research and development (R&D) in manufacturing, to ensure the workforce skills up, more intellectual property is generated and Indian telecom equipment manufacturers move up the value chain. An emphasis on R&D appears to be missing in the current scheme and there is also no specific provision for the development of software embedded in the equipment that is eligible for PLI.
There is a cap imposed on R&D expenditure at 15 per cent of the total investment – this is too low as it will mean lower value addition. This cap on R&D ignores the fact that all telecom equipment has high design costs and also a very high, integrated software component. Core, access and transport networks, which form the bulk of network capex, require the majority of investment in R&D in the initial phases of design. The increasing digitalisation of 4G networks also employs software-defined network solutions, and software development is integral to 5G network solutions. Thus, the scheme’s emphasis on manufacturing of “goods” without specific mention of software leaves another gap, which may be critical.
Promoting the intellectual property component is essential if India is to move up the global value chain. The World Trade Organization estimates that India’s contribution to the global supply chain is only 0.15 per cent for telecom equipment, and 0.068 per cent for information-centric networking components. It cannot achieve atmanirbharta without serious improvement in these areas. Otherwise, there is a danger that this PLI would merely result in the assembly of imported components.
A white paper by the Broadband India Forum (BIF) has the following recommendations that are relevant to the sector:
- Original equipment manufacturers must be granted “points” equivalent to the total value of exports that can be used to qualify as a Class 1 supplier for other products, which may not be manufactured in India (“deemed domestic”).
- The Ministry of Electronics and Information Technology’s definition of value addition must be adopted as a standard for telecom manufacturing, as it provides the full value of all components that go into a printed circuit board.
- An opportunity for domestic companies to form consortiums with MNCs on technologies such as 5G and IoT.
- 5G spectrum should be priced affordably and allocated quickly for network roll-out.
- Connecting rural or unconnected areas should be encouraged and prioritised.
- State-funded R&D (including basic research) by PSUs, research institutions and academia needs to be scaled up well above the dismal 1 per cent of GDP currently. Private sector delivery-oriented R&D could also be supported and be further linked to meaningful participation in manufacturing at appropriate levels of the supply chain.
- V Band should be made available with supportive and liberal policy measures to foster innovation, leading to the mass use of short-range devices (SRDs) for a plethora of applications, encouraging large-scale manufacturing of SRDs.
Some of these points in the BIF white paper would help address the gaps in the PLI scheme with respect to IP and value addition. India already has the second-largest user base for telecom services and there will be continuous and rising demand for telecom infrastructure. So, there is no lack of opportunity and the PLI scheme for the telecom sector is a welcome move. A review of some of the conditions mentioned above, and acceleration of the timelines for 5G auctions with lower base valuations for spectrum would ensure that the PLI delivers what India needs in terms of greater domestic manufacturing, greater value addition, and more intellectual property being generated domestically.