To promote indigenous manufacturing of telecom equipment, the Department of Telecommunications (DoT) introduced the Preferential Market Access (PMA) Policy in 2012. The policy guidelines state that over a period of 10 years, all government departments would have to meet 50-100 per cent of their telecom equipment requirement from local manufacturing companies.

The aim of the policy, apart from promoting indigenous manufacturing, is to address the security concerns associated with importing telecom equipment. Security agencies have often raised concerns over possible threats of spyware and malware being embedded in imported products, especially those manufactured in China. Also, the growing import bill for telecom products has been an issue. According to the government, telecom equipment worth Rs 769.4 billion is likely to be installed in 2012-13. This investment will increase to about Rs 1,700.9 billion by 2019-20.

Further to the PMA policy, in January 2013, DoT issued a draft notification (also applicable to private operators) directing that 14 categories of telecom equipment, marked “security sensitive”, would have to be sourced (100 per cent) locally between 2013 and 2020. Of these, products belonging to four categories would have to be sourced domestically by 2014.

This has ruffled the feathers of several entities including international trade bodies in the US and Europe. The three leading US trade bodies – the US-India Business Council, the Information Technology Industry Council and the Telecommunications Industry Association  – are reportedly planning to take up the issue with DoT and the Department of Information Technology. According to them, PMA for domestic firms is contrary to global trade rules. Besides, it devalues the country’s World Trade Organization treaty commitments. Also, according to these entities, interference in the private sector’s procurement of information and communication technology equipment citing national security concerns sets a wrong precedent for other countries.

The General Agreement on Tariffs and Trade  regulations also restrain governments from applying national security exceptions to discourage protectionist policies under the guise of security.

DigitalEurope, a trade body representing Europe’s biggest telecom equipment manufacturers including Ericsson, Nokia Siemens Networks, Nokia, Alcatel-Lucent, Siemens AG, Bang & Olufsen, Schneider Electric and Philips, also wrote to telecom secretary R. Chandrasekhar on the issue. The communique alleged that “using security concerns as the basis to promote local manufacturing is a coercive approach that will distort India’s investment environment. If the draft guidelines are finalised by DoT, it would represent unprecedented interference into the operations of private companies and completely undermine the ability of multinationals to compete fairly in India.” The European trade body also pointed out that India’s plans to create a globally competitive, domestic telecom equipment industry would not be successful if the PMA mandate is implemented in its current form.

Meanwhile, Indian industry lobbies have also said that the PMA notification is ambiguous and leaves considerable scope for abuse. Also, there is no transparent way to deem a product “security sensitive”.

The Cellular Operators Association of India (COAI) and the Association of Unified Telecom Service Providers of India (AUSPI) have contested that domestic sourcing and value-addition targets mandated by the draft PMA norms are “unrealistic” as there is no established telecom equipment manufacturing ecosystem in India. This has been conveyed to Chandrasekhar through a joint communication by COAI and AUSPI.

Further, COAI and AUSPI maintain that there is no connection between security and the location of manufacturing.  They have warned that any arbitrary invocation of PMA clauses to private sector procurement is an unprecedented interference and would result in significant disruption in the global telecom market. Also, the move would put pressure on the beleaguered Indian telecom industry. In their note to Chandrasekhar, COAI and AUSPI stated, “An attempt to link local manufacturing to security considerations is inappropriate since security cannot be guaranteed by merely requiring equipment to be manufactured in India. It is not where but how a product is manufactured that matters.” These bodies have urged DoT to engage in a fresh round of consultation with all stakeholders before finalising the domestic sourcing and value-addition targets set in the draft PMA notification. Moreover, they have requested the government to scrap the 16.38 per cent tax incentive on domestic manufacturing, which was introduced to support India’s ambitions of becoming a global telecom equipment manufacturing hub.

The recent opposition may have been triggered by the government’s decision to not allow global vendors to participate in the $4 billion National Optical Fibre Network project on security grounds, which created uncertainty for international vendors. However, DoT officials say that the draft notification is in line with international commitments. According to them, following the objectives of the National Telecom Policy, 2012, which envisages meeting 80 per cent of the telecom sector’s equipment demand through domestic manufacturing with a value addition of 65 per cent by the year 2020, will make the industry more self-reliant.

However, it is evident that though the move to promote domestically manufactured products is forward looking, there are several challenges in implementing it.

Industry experts believe that the country lacks an ecosystem to successfully implement the policy. “It hardly makes a difference whether a foreign vendor assembles its products in India or somewhere else. It will not be manufacturing these products here. It will just be fabrication work,” says an official from the Telecom Equipment Manufacturers’ Association of India.

According to Rajan Mathews, director general, COAI, “In order to manufacture telecom products, the country will have to go back to chip manufacturing, which makes little sense. There is a strong need for an ecosystem to meet the objectives of the PMA policy.”

Therefore, the industry believes that in the absence of proper infrastructure and competitive domestic telecom products, the implementation of PMA will only disrupt the global supply chain and distort prices. Also, state-owned and private mobile operators will be restricted from procuring cost-effective equipment through a global supply chain.