Strong Incentive: PLI scheme to encourage investments in domestic telecom equipment manufacturing

PLI scheme to encourage investments in domestic telecom equipment manufacturing

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.