New Delhi: To give a boost to local manufacturing and research in the telecom sector, an internal committee of the department of telecommunications (DoT) has recommended changes, including rationalization of taxes, creation of specific manufacturing zones and the setting up of a corpus of about Rs5,000 crore, said two DoT officials with knowledge of the developments.

Graphic: Paras Jain/Mint

The global telecom equipment industry is estimated at over $200 billion (around Rs9 trillion) per year and with the addition of telecom software and services the number would be much higher, one of the officials said.

In June, a committee headed by K. Sridhara, former member (technology) of the Telecom Commission, gave macro-level guidelines to enhance indigenous manufacturing and research and development (R&D) capabilities to DoT secretary P.J. Thomas.

Thomas formed another committee that held its first meeting in September to make more specific recommendations based on earlier suggestions to enhance India’s telecom manufacturing base and R&D, as well as for developing interception and monitoring technologies.

The new panel, headed by DoT adviser (technology), D.K. Agarwal, submitted its report to the department’s secretary last week.

Mint has reviewed drafts of the recommendations by both the committees.

DoT is expected to forward the latest report to the cabinet secretariat, from where it will go through a series of discussions within the government before becoming policy.

The proposals are some distance away from becoming law, as the Telecom Regulatory Authority of India (Trai) will have to be asked for its opinion as the proposals involve telecom service providers. Trai typically carries out a consultation involving stakeholders before making recommendations to DoT.

The department’s data show that production of telecom equipment in India at the end of March 2009 stood at Rs51,800 crore with a compounded annual growth rate (CAGR) of 29% in the previous five years.

A large part of this is related to the assembly of imported equipment and production of standard equipment by public sector firms, mostly for the military and railways.

To put this in perspective, Chinese telecom equipment maker Huawei Technologies Co. Ltd alone reported a revenue of $18.3 billion in 2008, up from $12.8 billion in the previous year.

India ranks fourth in telecom equipment manufacturing in the Asia-Pacific (Apac) region, technology researcher Gartner Inc. said in a recent report. The country had a 5.7% share of the region’s total telecom equipment production revenue of $180 billion in 2009.

“We expect India to move up to the third spot (after China and South Korea) with a share of 8.5% of the total (estimated) Apac telecom equipment production revenue of $277 billion by 2014," Gartner said.

The firm estimates India’s telecom equipment production revenue to grow at a CAGR of 17.1% to reach $22.6 billion in fiscal 2014. India will be the fastest growing telecom equipment production market in the Apac region over the next five years, it predicts.

Semiconductor consumption by telecom equipment makers in India will also grow the fastest in the Apac region at a CAGR of nearly 15% to reach $5 billion in 2014 from $2.6 billion in 2009, Gartner said.

“Indigenous manufacturing and R&D is very limited," said Ganesh Ramamoorthy, principal research analyst with Gartner. “This is not because of a lack of talent or what is called entrepreneurial skills; it is the cost of R&D that is the primary limitation."

Unlike Chinese companies that are backed by their government, Indian firms only get incentives such as soft loans at low interest rates. “The Chinese firms get loans at 0% interest and also get a lot of support in terms of dealer-supplier networks," he said.

Now, DoT’s internal committee has recommended that taxes on core telecom equipment made in India should be 5% less than in competing economies, or 5% (whichever is lower), said one of the officials cited earlier in the story.

Both the officials requested anonymity as they are not authorized to speak to the media.

The panel has also suggested a 5% tax reimbursement to service providers who buy equipment from Indian manufacturers, the official said.

As for the Rs5,000 crore corpus, the panel has suggested creating it by levying a 2% R&D and manufacturing cess on the adjusted gross revenue (AGR) of telecom service providers. AGR is the total revenue of a service provider less the revenue that does not accrue to it directly, such as service tax and interconnection charges.

Mobile users pay a 12% service tax and a 2% education cess on their bills, and may have to shell out more if service providers pass on any new surcharge that’s imposed on them.

This corpus could be used to provide a line of credit to equipment makers at a 5% rate of interest to be repaid in four instalments starting from the third year.

Another recommendation is for creating telecom manufacturing zones, with the necessary infrastructure and facilities, owned by the government and given on lease.

“They can be given the option of buying the facility from the government after 10 years at the market price," the DoT official said.

The panel also recommends hiring a number of facilitators trained in setting up manufacturing units, on a retainership paid by the government and the entrepreneur involved.

To ensure that telecom equipment makers treat their staff like any other contract-based employee, the panel has suggested that these firms not be subjected to existing labour laws, except those concerning health and safety and provident fund rules.

Other recommendations include introducing a mechanism of skill certification and developing an Indian standard for telecom equipment.

It also proposes requesting the Reserve Bank of India to frame guidelines for Indian banks to extend credit to foreign customers based on their creditworthiness if they buy equipment from Indian manufacturers.