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The PLI scheme for telecom hardware seems to be in choppy waters

The Department of Telecommunications on June 3, 2021 issued the operational guidelines for the Production Linked Incentive (PLI) Scheme for telecom gear and networking product makers under which 10 large companies and 10 MSMEs will be selected to receive sops, with the Centre hoping to attract investments of ₹3,000 crore and spur local manufacturing worth ₹2.4 lakh crore over five years.

The original scheme announced on February 24, 2021 has been tweaked after extensive consultations with stakeholders.

A total of ₹12,195 crore has been earmarked for applicants. The last date for submitting applications is July 3, 2021. 2019-20 will be treated as the base year, while the five-year period will begin from April 1, 2021.

To qualify under the scheme, the minimum consolidated global manufacturing revenue in 2019-20 for global companies is ₹10,000 crore, the domestic companies ₹250 crore and MSMEs ₹10 crore.

The scheme offers an incentive of 4 percent to 7 percent to MSMEs that must invest ₹10 crore, while large companies have an investment threshold of ₹100 crore. Of this, ₹1,000 crore have been set aside for the MSMEs. Out of the 10 non-MSMEs, at least three selected will be domestic manufacturers. As per the guidelines, non-MSMEs will be eligible for incentives ranging from 4 percent to 6 percent of incremental production in a year.

The applications will be shortlisted from highest to lowest on the basis of committed cumulative incremental investment during the scheme period. The investor must achieve net incremental sales equal to three times the amount invested that year to qualify for incentives. The upper ceiling for these targets is capped at 20 times of the amount invested.

A high-level committee headed by Rajiv Gauba, Union Cabinet Secretary, has called for setting up an effective institutional mechanism to constantly engage with manufacturers and make the initiative more investor-friendly by regular hand-holding and removing hurdles at the earliest.

Nokia and Ericsson have expressed their keenness to expand their existing operations in India for global supply chains, while Cisco, Ciena, Jabil, Foxconn, USA, and Flex have also shown interest in setting up manufacturing units in India. Indigenous manufacturers as HFCL, Coral Telecom, Sterlite, VVDN Technologies, and Dixon Technologies also plan to expand their facilities. Dixon has already announced a joint venture with Bharti Enterprises to manufacture telecom gear in India.

The recent announcement by Samsung deciding not to participate in the scheme is of concern. It would have meant a commitment of ₹8000-1000 crore. Of course, the vendor has had only one client, Jio in the country. Supplies have been mostly coming from its plants in Vietnam, South Korea and China where there is sufficient capacity. Moreover, imports from Korea and Vietnam are at zero duties through the free trade agreement route.

Some manufacturers have flagged issues related to the operational guidelines. The consolidated global manufacturing turnover shall be considered for electronics, telecom, and networking segments. However, the high base year turnover could be a deterrent for new age companies who have recently entered this segment in the wake of emerging technologies and innovation. Product categories and manufacturing segments in these segments can be widely interpreted so companies will need to carefully assess their product categories and manufacturing segments.

“Owing to the fixed budgetary outlay, the guidelines suggest a limit to the number of beneficiaries to 10 for MSMEs and 10 non-MSMEs (minimum three domestic companies), ranked in order of their committed cumulative incremental investment. Further, in the event of multiple applications at the same level of investment, ranking will be made as per global manufacturing revenue of companies in the base year.

Applicants with a higher investment commitment may have a better chance for selection. They must, however, bear in mind that where the commitment of investment is higher, the calculation of minimum incremental threshold and minimum investment for a particular year shall be based on that committed investment. No incentive shall be available if they fail to achieve the committed target in any year,” observes Kunal Chaudhary, Indirect Tax Partner, EY.

Investment under R&D and ToT has been capped at 15 percent and 5 percent, respectively, of total committed investment with the exclusion of manpower cost in captive R&D, which is a significant component of R&D costs. The companies driven by development of future technologies spend a large portion of their turnover on R&D, some research being outsourced to specialized contract R&D. This may mean that companies need to invest more in plant and machinery.

The guidelines may not be able to meet the Atmanirbhar Bharat vision since it will lead to just assembly and not the real development of telecom products in India.

This challenge makes the scheme skewed toward contract manufacturers at the cost of companies which are infusing hefty investments in R&D to develop the products. In case of a vendor supplying globally and outsourcing product manufacturing from OEMs, then under the scheme, it is the contract manufacturers who will reap the benefits of the incentives, and not the vendor who is investing in R&D.

Anshu Prakash
Secretary Telecom
Department of Telecommunications

“The PLI scheme will be a game changer.”

SP Kochhar
Director General

Cellular Operators Association of India
“India is already the second largest telecom market globally and this will go a long way in making the country a global hub for telecom innovation.”

Sandeep Aggarwal
Telecom Equipment & Services Export Promotion Council

“The best thing about the scheme is that it’s fully WTO complaint. It’s not only beneficial to MNCs investing in India but also Indian large industry and MSME enterprises too. The scheme requires IoT and thus will emerge huge manufacturing capabilities in equipment, electronics, radio and optical systems. As we build the complete supply chains from components to PCBs to radios and mobile phones and the emerging IoT products in India, we shall integrate with the global supply chains but more importantly the scheme shall be foreign exchange positive.”

NK Goyal
Emeritus, Telecom Equipment Manufacturers Association of India

“This is going to be a landmark happening for the Make in India initiative for telecom. TEMA compliments for the out-of-the-box initiative to reserve three applicants in each category only for domestic companies.”

Sanjay Bakaya
Country Head (India) and Regional Vice-President (India and South Asia)
Mavenir India Pvt. Ltd.

“This is a big policy decision by GoI in making India a global hub for telecom gear. It has come at the most appropriate time, when domestic industry is geared up for starting manufacturing within India. This will be a landmark to make India Atmanirbhar (self-reliant) with world-class manufacturing infrastructure.”

Vendors assert that capital investment should be allowed in any form, sans land and building, and that investment should not be restricted to just manufacturing plants and accessories. On the other hand, homegrown companies are of the opinion that the move has been made to plug the possibility of some global companies claiming large amounts as ToT, which are repatriated to their global headquarters, and also R&D expenditure as investment instead of putting adequate money in plant and machinery and creating assets.

The PLI scheme should be leveraged to enable exports — one way being to grant points to the total value of exports that can be used by them to qualify more easily for government procurement contracts.

No doubt, the PLI offers huge opportunities. At present there is a huge dependence on imports in the telecom sector. The core component of this scheme is to offset the huge import of telecom equipment worth more than ₹50,000 crores and reinforce it with ‘Made in India’ products both for domestic markets and exports.

Globally, telecom and networking product exports represent a USD 100 billion market opportunity, which can be explored by India.

The PLI scheme, combined with the huge domestic market potential, will position India uniquely, to become a global hub for manufacturing of telecom and networking products.

India’s competency in system design and system integration can be used to make it an end-to-end player in the entire ecosystem, if required incentives are provided.

By incentivizing large-scale manufacturing in India, domestic value addition will increase gradually. Provision of higher incentives to MSMEs will further encourage domestic telecom manufacturers to become part of the global supply chain.

The Government can explore linking the PLI scheme with the Make in India guidelines requiring adherence to local content norms for government procurement. Such linking may enthuse more PLI applicants to invest in India.

During the geo- political shift of investments, despite India being a most attractive destination with respect to talent pool, infrastructure and favourable government policy, a very high and significant share of investments have been going to other countries such as Vietnam, the Philippines, Thailand and Malaysia.

Now, more than ever before, there is abundant need for a multilateral approach on technical regulations and building a stable and predictable regulatory regime. India needs enabling laws and policies alongside voluntary, incentive-led schemes to propel investments in infrastructure and boost technology- driven systems so as to provide a fillip to local businesses through organic demand and investments – both domestic and global.

There is a need to create an ecosystem for the propagation of Industry 4.0 by every Indian manufacturer by 2025.

Sanjay Malik
Senior Vice President and Head of India Market
Nokia India
“Nokia will be applying for the scheme. The details are being worked out. We have a large manufacturing base for radio here. With the scheme, we can continue feeding the world market through the local factory and take the incentives. We will definitely expand our portfolio and expand our manufacturing base in India for the local component manufacturers.”

Nitin Bansal
Managing Director
Ericsson India

“As the first company to manu­facture telecom equipment in India since 1994, we welcome the PLI scheme since it will boost the manufacturing eco system in the country.”

Mahendra Nahata
Managing Director
Himachal Futuristics Communications Limited

“The scheme will make telecom equipment manufacturing in the country competitive, reduce imports and increase exports. PLI scheme will go long way in achieving the objective of Atmanirbhar Bharat. We will participate in the scheme.”

Sunil Vachani
Executive Chairman
Dixon Technologies

“This will give a big boost to domestic telecom equipment manufacturing and we will initially concentrate on equipment like Wi-Fi and routers. We think the ratio is reasonable. We will apply for the PLI in a joint venture with Bharti. The caps on R&D and transfer of technology are understandable because the focus of the PLI is on incentivizing manufacturing. It is a manufacturing PLI and not an R&D-focused one. So, the focus here is to build plant and machinery and assets and produce more.”

Ritesh Kumar

“With the already reduced income-tax rate for domestic manufacturing companies, the announcement of the PLI scheme will make India a lot more manufacturing friendly destination.”

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