The New Telecom Policy (NTP) 2012 — details of which were released late on Monday, 11 days after the Cabinet approved the policy — reveals major compromises in the government's proclaimed thrust on domestic manufacturing of telecommunications equipment.

Originally, telecom manufacturing was supposed to be the hallmark of NTP 2012 and a distinguishing factor vis-à-vis the earlier policies of 1994, which was focused on liberalisation of the services sector and private investment, and NTP 1999, which sought to lower the cost structure along with a change in the competitive landscape.

The considerably diminished thrust on telecom manufacturing by domestic players is significant considering that the draft policy projects domestic demand to be in the region of Rs. 2,50,000 crore by the end of the 12th Five Year Plan.

The draft policy, released in October 2011, had come under fire from at least four different sources on this and other accounts, including from the Finance and Commerce Ministries as well as from foreign manufacturers.

An entire section in the draft policy on provision for “preferential market access for domestically manufactured products with special emphasis on Indian products for which IPRs reside in India”, as well as one section addressing market distortions, incentives and market accessibility for indigenous manufacturing, has been dropped in the final policy. Further, the policy objective “to meet 80% Indian telecom sector demand through domestic manufacturing with value addition of 65% by the year 2020” has been considerably modified.

A provision for soft credit for Indian telecom equipment manufacturers for domestic deployment and exports has also been replaced with “putting in place a stable tax regime” and “provide appropriate incentives” — thus taking away any potential burden on the Finance Ministry for funding such projects. NTP 2012 thereby replaces direct government financial assistance with tax incentives.

Finally, taking a cue from the Commerce Ministry's comments relating to “carve outs” from India's international commitments relating to government procurement and security exemptions, the final policy has included a section stating that the government will “notify specific guidelines for according preference to domestically manufactured telecommunications equipment and products either for reasons of security or for government procurement in accordance with the relevant government decisions and policies in this regard”.

This “carve out” for government procurement and under security concerns could become a matter of controversy and debate since the entire telecom sector — especially the mobile networks, which are the largest users of telecom equipment — is considered highly sensitive, with several and multiple existing layers of restrictions. The interpretation of this ‘carve out' will finally reveal the extent and range to which domestic manufacturing of telecom equipment will be impacted by virtue of NTP 2012.

“The policy is a string of flowery statements that does not address the core issue of creation and promotion of R&D and IPRs which account for 80% of the cost of the equipment. Without this, there can be no growth of manufacturing,” said Ashok Aggarwal, honorary director general, TEMA.

The background to this excessive dilution of the government's key proposal is an attack by foreign telecom equipment manufacturers across the U.S., Europe and Asia on the draft policy for offering ‘preferential market access' for domestic manufacturers, citing multiple violations of India's commitments to WTO and GATT in their complaints to the commerce ministry.

Finding merit in these arguments, the Commerce Ministry wrote to the DoT regarding the violations arising out of granting preferential market access to telecom products manufactured in India. Additionally, at the stage of the draft Cabinet note, the Commerce Ministry specifically cautioned the DoT to either delete or reword the language to avoid violation of India's international trade commitments.

The Finance Ministry, had also expressed its reluctance to provide additional funds to promote domestic manufacturing.

Over the last 7 months, large Indian businesses, including those in the telecom sector, have also stated their disinterest in making large investments into domestic telecom equipment manufacturing — mostly because of the high R&D costs, competitive price structure of international equipment providers, and their previous experiences of several joint ventures to manufacture telecom equipment in India since the mid-90s failing to take off.