Revisiting local value addition norms in manufacturing

Electronics majors like Apple, Samsung, Lenovo, HP, who have set up their manufacturing bases in the country, either directly or through contract manufacturers, will not be subjected to any fixed timeline to increase domestic value addition. However, the government will consider putting in place a definition of what constitutes domestic value addition so that there’s no manipulation by any player by taking into account non-core components.

The issue of defining what constitutes local value addition is being considered because lately many local telecom as well as electronic suppliers have expressed concern over manipulation by certain global and large Indian companies in this regard. The alleged manipulation happens when companies include elements like tower erection, civil work, installation charges, annual maintenance charges (AMC), software costs, etc under local value-addition to take benefits of certain schemes or meet the eligibility criteria for certain government tenders. For instance, to qualify for any government tender, a minimum of 20% domestic value addition is required.

“Though we are focused on increasing the domestic value addition, but right now the focus is to move the manufacturing base of these companies to India and make them not import from non-trusted sources. Simultaneously, we are growing the domestic industry, the local component makers, etc,” a government official said. “There are already green shoots in domestic value addition and we will see when we need to give them a target, and may be make it part of PLI,” the official said.

This also assumes significance as the Telecom Regulatory Authority of India (TRAI) in its recommendations on Promoting Networking and Telecom Equipment Manufacturing (NATEM) said that the Department of Telecommunications (DoT) can introduce a 50% local value addition criteria for companies to get incentives under the future production-linked incentive (PLI) schemes.

Barring the PLI scheme for auto sector where applicants have to achieve a domestic value addition of 50% to claim incentives, no other PLI scheme has this sort of requirement. In the design-linked incentive scheme, DoT has introduced a clause for eligibility whereby minimum 50% of the components by value terms, used in the manufacturing of the specific end products must be manufactured in India.

In its recommendations TRAI has cited some stakeholders pointing out that in certain public procurements, such as in USOF (universal services obligation fund) tenders, element-wise compliance of local content requirements, is not monitored.

Some of the industry executives also mentioned that present calculation methodology doesn’t capture the local value addition at the project level. “The cost incurred for local sourcing of material for network rollout, spares cost, warranty, AMC etc, are not captured. Main inputs/ stages cost incurred on assembly/ testing/ integration and other necessary requirements for deploying the equipment in the network are not being considered as well,” TRAI has said.

With regard to the IT hardware, the government aims to meet up to 70% of the country’s requirement through local production in the next three years and reduce dependency on imports from non-trusted sources. Officials believe that with increase in domestic manufacturing, automatically the value addition component will go up.