Introduction of the production-linked incentive (PLI) scheme, together with enhanced technology support led by the adoption of open radio access network (RAN) and investments in 5G telephony, is expected to ring in a course reversal for Indian telecom companies (telcos), which have been largely import-dependent and reliant on global vendors for their network roll-outs.
So far, imports have accounted for 75-85% of the total telecom equipment market. While some global vendors have their manufacturing bases in India, majority of equipment has been imported from East-Asian countries such as China, Malaysia, South Korea, and Vietnam.
The nascent domestic equipment industry, on its part, has been catering mainly to public sector undertakings (PSUs). All that is expected to change now, with the government extending the PLI scheme to the telecom equipment sector to boost domestic manufacturing and attract investments in the target segments of telecom and networking products.
Under the scheme, 10 MSMEs and 10 non-MSMEs (of which at least three are domestic companies) will be shortlisted on the basis of their investment commitment. The shortlisted companies will then receive incentives for incremental sales generated over the base year, fiscal 2020.
The government has earmarked ~Rs 12,200 crore for the scheme, and expects investments of ~Rs 3,000 crore, with an incentive to capex ratio of 4:1, which is the highest among all PLI schemes.
The fledgling domestic equipment industry missed the last wireless capex boom over fiscals 2016-2021, which saw telcos pump Rs 3 lakh crore to strengthen their 4G networks, as they were largely dependent on global vendors for their core, radio and transport network rollouts.
5G networks, however, are expected to see significantly higher investments as they entail at least 70% tower f iberisation levels (30-35% presently) and 4-20 times higher radio site deployments compared with 4G. This would lead to higher investments in optical and radio networks, respectively. With PLIs covering major telecom equipment, except optical fibers, domestic gear manufacturers can leverage a Rs 50,000 crore market opportunity, which is expected to double by fiscal 2025.
Additionally, the advent of open RAN, which seeks to end the proprietary RAN set -up, will result in the disaggregation of hardware and software at radio sites, allowing domestic gear makers to manufacture and innovate in individual modules, such as antennas and remote radio heads, or more contemporary forms of radio nodes, such as small cells.
The PLI scheme has been timed well ahead of the 5G launch, and provides the much-needed policy boost to the domestic telecom manufacturing ecosystem. It has the potential to reduce the share of telecom imports in overall demand to under 50% (from 75-85%).
However, it can be constrained by low cap on R&D investments, pricing pressure in the telecom industry and delay in 5G auctions.