Make By India

Make in India needs policy support for access to markets and much else.

Shyam Ponappa   |   July 7, 2016

It is a truism that Make in India requires the implementation of supportive policies for Indian manufacturers, especially when it comes to leading edge equipment. This raises the issue of what exactly our governments are doing for us, or to us, in the name of progress. It is “governments” in the plural, because the problems date from way back before the United Progressive Alliance-II, and carry through to the present. No doubt some of it arises from the genuine complexity of figuring out all the detailed steps in many domains, which are truly omnibus in character.

These are aspects beginning with the primary objectives and organisation in the context of public policy and practices, necessarily including market access, and extend to the formulation of primary and secondary laws that align with existing legal and customary requirements, followed by detailed regulations and procedures, economic and financial linkages, requisite institutional and process changes, and so on. Yet, all these have to be thought through and articulated, and ultimately made to happen, for robust development. Particularly in strategic sectors, policy support is essential in areas such as facilitating access to local markets for scale, to equity and debt finance, good logistics, and effective infrastructure. 

How does a domestic start-up in high-technology manufacturing break into the charmed circle of contract awards? The answer is that it doesn’t, unless it’s favoured by a government with foresight (for details of the predicament, see “Domestic High-Tech Manufacturing Needs Access to Markets”, Business Standard, August 1, 20131). Otherwise, Indian manufacturing companies with promising products have to actually succeed in markets abroad before they can compete for contracts in India.

Now consider the status of the long delayed and languishing Digital India initiative. After the radical changes introduced by the National Democratic Alliance-I and the tremendous growth of mobile telephony with limited broadband thereafter, little has changed in the policy space to bring about accelerated growth in broadband, especially not in rural India.

There is a known record of Indian manufacturing companies having to deal with the government’s non-adherence to its own policies on tenders. But that’s a separate discussion. The following case exemplifies another problem. There is a start-up manufacturing venture that has designed and built some really innovative wireless equipment from scratch. Its products are of the sort that are of critical importance in extending broadband communications access for TV, data and voice, especially in rural and semi-urban areas. Some of these products compete favourably with international products in early-stage trials that are under way. For such products to be even tested before deployment, however, new enabling policies have to be formulated, together with the associated rules and procedures — an aspect not handled well historically in India.

There are no major international vendors for these devices as yet, because there are no established external markets for such equipment. This is essentially because the developed world has extensive fibre and wired networks, and limited demand for such wireless products. The markets in developed countries may well open up once the devices are available in volume and prices drop, but it’s a chicken-and-egg situation. Yet, this Indian company has to rely on investors from abroad for most of its funding, and for such ventures, it’s a struggle to bring their products to the market. With supportive policies, these devices could be a force multiplier for broadband. Instead, this group of Indian entrepreneurs, who thought they were starting up a fabless chip design venture, has found out that there is no ecosystem to support such enterprises. 

That’s not all, because there are policy hurdles at every step. For instance, there are no designated frequencies available to such pioneers for testing their products. Each test has to be applied for in a slow process controlled by the Centre. While concern for spectrum allocations which could be easily misused in these troubled times is understandable, there appear to be no streamlined protocols in place for clearing applications from such high-tech manufacturing entities for testing their equipment, and the process takes an inordinate amount of time. Companies such as this should be feeding into and growing on the huge market that must be bridged in order to arrive at Digital India. Instead, our policies seem counterproductive, and on the market side, the government contends with the operators, who contend with each other unceasingly in factional wars of attrition. 

There are no promising developments regarding market structures or policies that could lead to orderly, rapid growth. These could include the permitting of unused frequencies for extending broadband access, common (unbundled) access to last-mile links, or shared network facilities. If unused spectrum were made available to operators in an orderly fashion, for last or intermediate-mile/backhaul to link up with fibre, rural users would get broadband access, operators would likely get better revenues from shared infrastructure — and the government’s revenue share would also increase.

The weight of legacy problems, together with inappropriate foreign models and unsupported local manufacturing appear to confuse analysts, academics, administrators and the legal community. Those in decision-making positions with good insight seem intimidated by the scope of the problem, which calls for complex financial restructuring together with other difficult organisational measures for change.

What’s to be done? Here’s where the government has to intervene and act cohesively with understanding and wisdom. Just as there is no way in which electricity supply can be successful without central initiative, coordination, and convergent action by stakeholders, so also broadband and communications networks cannot be provided without a problem-solving approach using collaborative solutions among this set of stakeholders and the government.

Only the Centre can provide a constructive lead on these issues, in a manner similar to what may be happening in cutting the Gordian Knot of electricity supply.2 The ministries and regulators should take the initiative to collaborate actively in pulling together all operators, suppliers and agencies to hammer out a solution that is practicable. Broadband coverage would improve, and India
could build a leadership position in last-mile access technologies.

______________________________________________________________________

Shyam Ponappa at gmail dot com

1 http://organizing-india.blogspot.in/2013/08/domestichigh-
tech-manufacturing-needs.html

2 http://organizing-india.blogspot.com/2016/06/theepiphany-
in-power-reforms.html

Domestic High-Tech Manufacturing Needs Access To Markets

Breaking into the closed circle - Domestic high-tech manufacturers need help to break into a closed circle and gain market access.

Shyam Ponappa  August 1, 2013

The deferral of India's preferential market access (PMA) policy for locally manufactured high-tech products indicates some lack of clarity and/or confusion in the government. There are compelling reasons for supporting domestic manufacturing capacity in India, and high-tech products deserve high priority. Examining the elements of the proposition for developing our high-tech manufacturing and the state of its capacity may help clarify where and how policies should be heading. If domestic electronics production does not increase significantly, India's electronics requirements will be choked by high imports in excess of even oil imports.

The Bogey of Protectionism

The aim of the PMA policy is to give technically qualified domestic manufacturers access to otherwise closed domestic markets. It only provides an opening, and does not provide any protection or price preference. The notification states explicitly that technically qualified domestic manufacturers are eligible only if they match the lowest bid; if there are no qualified local manufacturers, or if qualified vendors don't match the lowest bid, entire orders may be awarded to the lowest-priced vendor/s (from abroad). Perhaps there is some confusion arising from the nomenclature, as "PMA" usually refers to international vendor access to domestic markets. The notion that the PMA is protectionist and shields domestic suppliers from competition is incorrect.

Deferring PMA to Assess Domestic Capabilities

The government's deferral of the PMA pending assessment of domestic manufacturing capabilities appears unreasonable, as there are already qualified manufacturers in India, several of them transnationals, producing high-tech products for global markets. The top 10 global fabless design companies and the top 25 semiconductor companies operate in India. In 2010, revenues were estimated at $7.5 billion, and in 2012, over $10 billion. India is reportedly among the top countries for fabless design skills, and has the critical ingredients for the growth of fabless companies as start-ups slow in the West: design service companies, design engineering expertise and innovation, returning entrepreneurs, and educational facilities. What they need for scale is local market access, equity funding, good logistics, and effective infrastructure. These are the areas where the government can facilitate matters. Deferring access to local companies at a time of rapid growth in networks will entrench foreign products, providing them with an undue advantage against local producers. Instead, we should be capitalising on our domestic strengths.

Closed Circle of Buyers & Sellers

In high-technology procurement, large international vendors, of whom there are relatively few, form long-term relationships with the relatively few large buyers in oligopolistic markets in telecommunications or electricity. This holds whether the buyers are government entities, state-owned enterprises, or private sector companies. Often, the international vendors have strong home government support. This is why domestic manufacturers need mandatory access to break into a closed circle. There is no ambiguity in this, nor is it protectionist, and there are no price preferences - in contrast to the 15 per cent allowed by the World Bank, or 10 per cent for minority-owned businesses in the United States.

Markets & Demand

Of the many reasons for developing electronics manufacturing capabilities in India, a compelling one is our level of demand for electronics. A task force comprising government and industry participants estimated in 2009 that demand in 2009-10 was around $45 billion, going up to $70 billion in 2012, and projected at $400 billion by 2020 (see chart), with government's share being 40 per cent.

Source: http://deity.gov.in/hindi/sites/upload_files/dithindi/files/Task_Force_Report-new_21211.pdf

Domestic production was at $20 billion in the financial year 2009 while imports were $25 billion, projected to rise to over $300 billion by 2020 if domestic production maintained its trend to reach $104 billion. However, with appropriate policies including the PMA for local manufacturers, in the best case, domestic electronics manufacturing was estimated to increase to over $300 billion. If this could be achieved, India's electronics imports would amount to about $100 billion. Without it, imports of $300 billion may be needed, exceeding even estimated oil imports.

Security Screening/Auditing of Imports

High-security applications in the US, Japan, Israel and China are procured from trusted domestic manufacturers. The US Congress monitors high-tech imports for strategic reasons. The UK is conducting an investigation into whether its broadband networks have been compromised by foreign suppliers, although malware is very difficult to detect, and can be downloaded after security audits. High-tech supplies need to be from trusted sources.

Domestic Producers vs Other Lobbies

In effect, it would seem that the operators and foreign vendors have railroaded the government into perpetuating the status quo of foreign-dominated electronics suppliers in India. Facilitating access to local markets for domestic manufacturers is the kind of support that many governments provide. Take the case of the "Buy American" provisions of the American Recovery and Reinvestment Act of 2009. Recovery Act funds used for the construction, alteration, maintenance or repair of public buildings and public works must procure all iron, steel and manufactured goods produced only in the US, with a price preference of 25 per cent. The exceptions are non-availability, prices of over 25 per cent, or where applying the provisions is against the public interest. The objectives were to save and create jobs, to give relief to those affected by the recession, and to invest in infrastructure, education, health and renewable energy. The estimated cost is $831 billion between 2009 and 2019.

Remedial Action

What's needed is for the government to take unequivocal action without delay on enabling policies for domestic high-tech producers. The sooner this is done, and the more sustained support that is provided, the better. Too many confused signals are being sent out on investments.

---

Shyam Ponappa at gmail dot com