Centre for Internet & Society

Broadband in India needs reforms for local manufacturing and for infrastructure expansion and utilisation.

The article was published in the Business Standard on May 31, 2017 and in Organizing India Blogspot on June 5, 2017.

India’s markets are at the heart of what attracts investment and economic activity, with mobile phones and broadband services comprising a significant share. In exploring their magnitude and supply chains, an obvious need emerges for policies and incentives for local manufacturing of components and handsets to boost domestic supply and create employment. Another avenue for deriving local benefits is extending the coverage of digital platforms, expanding the market through policies and incentives facilitating broadband infrastructure. Policy support can help both to extend networks using fixed and wireless technologies, as well as to increase capacity utilisation.

Reforms affecting both supply and demand are needed to fully and equitably provide ubiquitous coverage and exploit digital platforms for public welfare. Such reforms would mitigate the lower revenue potential of rural populations. Enabling steps could include allowing active sharing of spectrum and networks, providing more unlicensed spectrum, financial incentives such as tax credits and spectrum charge rebates for rural infrastructure, and standardised right-of-way charges.

India’s Mobile Handset Market

"A billion smartphones will be sold in India in [the] next five years."

This estimate is from a report by IIM-Bangalore and CounterPoint Researchers.[1] The report notes that India became the second-largest global smartphone market in terms of number of users in early 2016, and still has enormous growth potential even as demand for smartphones elsewhere is waning. In the next five years, almost a billion smartphones and half a billion feature phones will require components worth $80 billion (Rs 5.2 lakh crore). These will have to be imported if they are not produced locally. The report estimates that in 2016, about 50 local units assembled over 180 million mobile phones valued at $9 billion (about Rs 59,000 crore), about 70 per cent of the $13 billion sold. However, the local value addition was only $650 million (Rs 4,225 crore, or 7.2 per cent). This underscores an urgent need for policy changes, considering that emerging manufacturers in these sectors such as  Brazil and Vietnam have value added of nearly 20 per cent and over 30 per cent, respectively, while champions such as South Korea and Taiwan add above 50 per cent, and China has 70 per cent local value added.

In early 2016, India’s domestic smartphones had a 40 per cent market share, but by the quarter ending March 2017, Chinese brands dominated, with a share of over 51 per cent, while local brands dropped to under 14 per cent.[2]

According to the IIM-B/CounterPoint Researchers report, Indian manufacturers import most of their components, and there are few incentives for R&D or to attract component suppliers to form local ecosystems. Further, the existing incentives will become ineffective once the goods and services tax (GST) is introduced, because they will all be subsumed under GST. Accordingly, the Broadband India Forum in association with EY have suggested (a) refunding the GST to manufacturers for handsets and (b) extending this policy to components could provide an appropriate manufacturing incentive.[3] This needs to be done without delay.[4]

The report also proposes a phased approach to maximise local value added, aiming for 30 per cent by 2020, and more thereafter. Early phases suggested are moving from assembling chargers and other such accessories to high-value components such as printed circuit boards, cameras and display units. The researchers suggest that chargers, batteries and cameras can in fact be manufactured locally, contributing to components valued at an estimated $15 billion by 2020. If these proposals are adopted and executed, it will reduce imports and create jobs, deriving local benefits from India’s market opportunities. Moreover, it will help create an R&D capability in India for this sector, which can over time become a supplier to global markets.

The prerequisite for these improvements is policy reforms on matters such as duties on components (including the refund of GST) and incentives for suppliers to set up in India. The report also suggests that policies need to be framed for effectively funding institutions and corporations for research to build intellectual property and skilled professionals.

Extending Digital Infrastructure & Utilisation

There is a parallel need for policies supporting the extension and coverage of digital platforms, of the sort achieved in migrating from up-front auction fees to revenue sharing with the New Telecom Policy in 1999 (NTP-99). These require convergent action within the government and its multifarious departments and agencies, or in some cases by coordination and resolution among stakeholders, i.e., in addition to the agencies of government, the judiciary, the operators and vendors of equipment, the press and media, and the public.

There are some issues that relate to the Telecom Regulatory Authority of India’s (Trai) recommendations over the years that need decisions on implementation. An example is access to broadband services through cable networks. The government’s position on additional charges as a share of revenues conflicts with cable operators’ unwillingness to pay additional charges, and perhaps the cost of the devices for conversion. The effect of this deadlock is that the entire set of cable network users have to use another means for broadband connectivity. As this policy change will affect the competitive dynamics of wireless service providers, it is a candidate for coordinated, participative resolution. Some Trai recommendations may benefit from review, such as open access (like Wi-Fi) on 60 GHz.

Other examples are:

  • Enabling additional bands of unused spectrum such as 60 GHz and 70/80 GHz for wireless gigabit links, and
  • Enabling the sharing of entire networks, including the radio access network (and therefore spectrum) among operators.

The promise of digital platforms is immense, and both these streams of reforms need to be taken up and completed for India’s digital platforms and markets to deliver on their considerable potential.

[1]. “Mobile Phone Manufacturing: A Practical Phased Approach,” by Pathak, Chatterjee and Shah: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2874689

[2]. http://www.idc.com/getdoc.jsp?containerId=prAP42557317

[3]. http://www.communicationstoday.co.in/index.php/daily-news/6710-broadband-india-forum-with-ey-releases-the-research-paper-on-incentivizing-domestic-handset-manfacturing-under-gst Added after publication - June 6, 2017

[4]. For a detailed exposition of the GST question and why raising customs duties on imported equipment/components is not feasible because of the terms of the Information Technology Agreement 1997 under the WTO, see: https://www.linkedin.com/pulse/incentivising-manufacturing-mobile-phones-india-parag-kar

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