Winston Churchill once famously said – “Continuous effort – not strength or intelligence is the key to unlocking our potential”. The government seem to have drawn lessons from this timeless phrase.
With a continued thrust on self-reliance coupled with slew of game changing financial and digital reforms, the long-awaited Indian manufacturing revolution seems to have finally taken off in earnest. Add to that, the Production Linked Incentive (PLI) Scheme introduced last year have furthered the momentum, drawing encouraging response from global and domestic manufacturers alike. The Electronics manufacturing space, for example, has seen significant traction, offering the perfect prelude to greater capital inflow for the exchequer. The cumulative scale of incentive offered is over INR1.9 Trillion, with a potential to catalyze an exponential increase in the country’s manufacturing output in the times to come. The calibrated approach towards shortlisting the sectors will drive greater use of cutting-edge technology, faster integration with global value chains and large-scale job-creation.
With an outlay of INR 12,195 crores the telecom sector now joins the PLI bandwagon along with 9 other promising sectors. This was notified earlier this week, with the Union Cabinet approving the details of the PLI scheme for the sector.
The scheme, as per details, applies to core transmission equipment, 4G/5G, Next Generation Radio Access Network and Wireless Equipment, Access and Customer Premises Equipment (‘CPE’), Internet of Things (‘IoT’) Access Devices and Other Wireless and Enterprise Equipment i.e. Switches and Routers. It stipulates a minimum threshold of INR 10 crores for MSMEs with incentives ranging between 7% to 4% of incremental sales (with FY 2019-20 considered as the base year). For others, the threshold is INR 100 crores with incentives between 6% to 4%.
The Government expects that this scheme will result in an incremental production of INR 2 lakh crores over the next five years and give India a sizeable foothold in the USD 100 billion telecom and networking products exports market.
Implementation will hold the key
One of the unique operating levers of this scheme is the diverse nature of companies who would look to benefit from it. Case in point being the MSME segment, for which the minimum threshold is INR 10 crores, while for the others, its INR 100 crores. While extending this benefit to MSME is a welcome move, this gap between 10 and 100 crores appears to be quite significant and many companies, run the risk of non-qualification. So, while implementation holds the key to success, so does the ability of the Government to address potential grey areas like these.
The notification issued on 24 February was an important step in addressing some of grey areas. Firstly, the exhaustive eligibility list of the various telecom networking equipment, IoT devices and other telecom related items is a welcome step. The notification also re-emphasized that the eligibility to the scheme will be subject to achievement of the minimum threshold of cumulative incremental investment and incremental sales over the base year. Thereafter, it went on to carve out thresholds of incremental sales for each year based on a prescribed formula (i.e. three times of a certain percentage of total committed investment, subject to overall cap of 20 times of a certain percentage of committed investment. While the intent behind the multi-layered yearly thresholds is well appreciated, one hopes that these will not end up making the entire process more cumbersome.
Another other aspect worth considering is the quantum of outlay which as noted earlier, has been pegged at INR 12,195 crores. Telecom has been one of the key contributors to India’s growth story over the years. It played a crucial role during the Pandemic in keeping everyone connected in isolation and ensuring that economy continues moving forward. With 5G on the anvil, the potential of the telecom sector and the role it can play in India’s growth story going forward is widely recognized. Therefore, it may be worthwhile for the Government to perhaps consider an increase in the outlay by at least 50% for the scheme to cater to the potential boom that awaits the telecom sector.
The scheme, through its detailed guidelines, must also ensure that manufacturing activities which result in a substantive value addition are the ones which get to avail the benefits of the scheme. Mere assembling of imported components or other forms of manufacturing which add little or no value addition to the product will not generate the kind of employment the Government is hoping for.
Covering R&D under its ambit
The guidelines to the scheme should also create enough room for Research and Development (‘R&D’) to be considered within the purview of manufacturing. This would ensure that the employment generation is just not restricted to low/medium skills group but also covers the growing highly skilled workforce. A robust focus on high-end manufacturing and R&D could help achieve that purpose.
In summary, while the scheme may have been announced post extensive external consultations, keeping in mind the shifting global supply chain dynamic, the age-old issues plaguing the manufacturing sector need to be addressed to find enough takers. Prominent amongst these are land acquisition and labour reforms and access to world class infrastructure at reasonable costs. If the PLI scheme can be supplemented with these measures, it will be sure to bring India, another step closer to becoming the manufacturing hub for the world.