Friday, February 19, 2010

Industrial policy in telecoms?

India is at the threshold of becoming the second largest telephone market in the world and its telecom operators are now scouting the world for expanding operations. The dramatic development of the sector has been projected as an example of how the power of private sector and markets should be unshackled to promote economic development. But as Sanjay Nayak writes in a recent Mint op-ed, all is not well

"Most leading countries in the world have nurtured their telecom products industry that have not only met internal strategic needs, but also created successful businesses that export several billion dollars worth of equipment around the world. Unfortunately, our domestic growth in telecom has not resulted in creating even a single global telecom product company. Compared with India, China with a proactive policy and government support has been able to create a $50 billion telecom product and ancillary industry that has gained global success.

The focus of our telecom policies over the last 15 years has mainly been on delivery of cost-effective telecom services. There has been no support or encouragement in creating a strong domestic product industry, resulting in large-scale import of equipment, rather than manufacturing them locally. Unless we take immediate steps to encourage product development, we will be importing at least Rs5 trillion of telecom equipment in the next five years. More importantly, we will miss a unique opportunity to create another knowledge-based industry and several jobs, which could replicate the success of our information technology services industry."

His policy prescriptions include Indian product companies being mandatorily given access to a certain percentage of the Indian domestic demand; matching R&D funding to entrepreneurs to create products and IPR; provide long-term working capital at competitive rates; promotion of telecom product exports as a thrust area for bilateral trade. I do not agree with some of them and there are other, less market distorting, ways to promote the sector.

If proponents of market-based approaches were correct, given the size of India's telecoms market and the potential for its growth, a large and competitive telecom products industry should have been up and running by now. However, despite the large technical and mangerial workforce, dominant domestic telecom service providers, a large and growing market, and domestic companies intent of expanding abroad, India does not have even a single global telecom product company.

The contrast with China could not have been starker. The development of massive capacity addition in conventional power generation, renewable energy, and high-speed rail have paralleled the emergence of downstream equipments and design sector. Local manufacturers have leveraged on the massive economies of scale presented by the capacity addition programs and developed world-class domestic design capabilities and manufacuring facilities. These manufacturers who emerged with active and well-planned government policy support, are today among the world leaders in their respective sectors and are capturing an increasing share of the rapidly expanding market (a large share of which is in India).

India should take a leaf out of the Chinese book and promote its own telecoms product sector - atleast the higher end R&D, intellectual property rights (IPR) creation, marketing, branding and support - and in the process help domestic makers capture atleast a share in the coming Rs 5 trillion domestic telecom equipment market and also the even larger global ambitions of Bharati and Co. If this requires an enabling policy framework called "indstrial policy", then so be it!

Update 1 (30/4/2010)
Citing security concerns, India has banned import of certain Chinese telecom equipments.

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