On Self Reliance and National Security in Telecom Sector

BUSINESS INTEREST VERSUS SELF RELIANCE AND NATIONAL SECURITY

The ongoing Conflict In Telecom Sector

                                                                                              -------------P.Asokababu

Tremendous  Growth

The  growth of  telecom services sector in India is tremendous.  In  1997 India had   1.75  crores telephone lines (1.7 crore wire line  and 5 lakhs  wireless lines).  It reached to 85  crores  (82crores wireless and 3 crore wireline) on 31-3-2011. The internet services were launched in 1995 and as on 31-3-2011 there were 1.2 crore broadband connections. Today India is in second place after China in the world  in the number of telecom subscribers (On 31-3-2011 China was having 119 crore telephone subscribers-wireless-90 crore and wireline-29 crore. By July 2010 it had 36 crore broadband connections).

Dependent and Destructive Growth

While the growth in China is based on self reliance, the growth in India is a dependent growth with destruction of the existing capacities and potentialities.

Domination of Foreign investment in telecom service sector

The private telecom operators Airtel, Reliance, Vodafone, Idea, and Aircel together are having 72% of the telecom subscribers with them. Each of these Companies is having 74%  Foreign Direct Investment (FDI) .  Thus the foreign investment is dominating the Indian telecom services. BSNL and MTNL together account for 12% of the telecom subscribers. The remaining 88% are with private telecom operators dominated by foreign investment.

Foreign controlled maintenance  and operations of telecom services

It is not only the foreign investment that is dominating the Indian telecom services sector. Even the maintenance and operations of  telecom net work is mostly done by foreign companies.  Bharti Airtel, the largest mobile service provider in India outsourced everything except marketing and branding. Its networks are maintained  and operated by foreign companies Ericsson, Nokia Siemens, and Huwaei. Its IT and applications  is by IBM. Other private telecom operators also are having their networks maintained and operated by foreign companies.

Telecom Equipment Production-Indian Products(IP) and Indian Manufacture(IM)

In order to understand the domination of foreign telecom equipment in Indian telecom sector, it is necessary to understand one important point regarding telecom equipment manufacture. 85% of the value is created in telecom equipment manufacturing by the company which does the R&D(Research and Development), designs the products and owns the IPR(Intellectual Property Right) and brand. The physical manufacturing and assembling of telecom equipment which is called as “Electronic Manufacturing Service(EMS)”  contributes to 15% of the value. We can call it the “Indian Product”( in short “IP” ), where the R&D, designing the product, IPR creation and then EMS are  done in India by Indian Companies. In this case of “Indian Product”(IP) the value addition is more. But in case only the physical manufacturing and assembling is done in India whereas the IPR resides with a foreign company, it has to be called as “Indian Manufactured Product”(IM). In this case the value addition is very less. 

Total domination of foreign equipment

The telecom equipment for this enormous expansion is almost imported and the value added in India is negligible. The cost of telecom equipment installed in the year 2008-09 was Rs 93600 crores (page 36 of TRAI’s Consultation Paper on “Encouraging Telecom Equipment Manufacture in India” published on 28-12-2010). In this, Rs 44800 crores  was for importing completely knocked down(CKD) equipment, and Rs 48800 crores was manufactured in India.  But in this, “Indian Products”(IP) is negligible and “whatever manufacturing happened in India, consisted of only low value- adding  assembly/soldering activities as the PWC report(TRAI Consultancy paper dated 28-12-2010). As per the report of the Consultancy PWC ( Price Water Coopers), the value addition in Indian manufacture is only 11%. Therefore out of this Rs 48800 crore equipment manufactured in India, only Rs 5368 crores was the value added in India for assembling these parts or for some indigenous production. Thus in one year, out of a total Rs 93600 crores  expended  for equipment, only Rs 5368 crores accrued  to Indian manufacturers  and the remaining Rs 88232 crores accrued to foreign manufacturers. During the years 2004-05 to 2008-09, equipment costing Rs 309369 crores was utilised for telecom expansion in India and only 11% of this i.e 34031 crores was the value created in India and a huge amount of Rs 2,75,338 crores accrued to foreign manufacturers.  In this Rs 1,24,280 crores was for importing completely knocked down(CKD) equipment, and Rs 150518 crores was for importing semi knocked down (SKD) equipment.

Resources-incoming very less, but outgoing too much

The total FDI inflows in Indian telecom sector during the period April 2000 to January 2011 was Rs 46746 crores ( TRAI recommendations dated 12-4-2011, page 42). But as detailed above,  between 2004-05 to 2008-09 India paid Rs 2,75,338 crores to foreign telecom equipment manufacturers. If we add the dividends and other amounts paid to the foreign investors holding majority stake in the telecom service companies, the amount drained away from India will be much more.

Destruction of existing capacities and job loss growth

This dependent growth resulted in  total negligence of indigenous research and development (R&D) in telecom technology and as a result no worthwhile IPRs (Intellectual Property Rights) are developed and owned by India. The premier telecom R&D institute C-DoT became almost defunct. Its premier equipment manufacturing companies in Public Sector like ITI, HCL etc became loss making enterprises. The telecom services PSUs BSNL and MTNL on which the Government and nation has to depend in emergencies and for providing services even in loss making rural and backward areas in the interest of equitable development of all areas in the country, have become loss making enterprises. The  number of employees in BSNL came down from 3,97,000 on 1-10-2000(its date of creation) to 2,87,749 as on 31-12-2010. In MTNL it came down from 62000 in 1998-99 to 45000 now. In ITI it came down from 23567 in 1999-2000 to 12745 at present. The landline network, which is a national asset, very much useful  is being allowed to die slowly.

 Threat to national Security

This heavy dependence of Indian telecom sector on foreign companies both for equipment as well as for maintenance and operations of the services has become a cause of concern with respect to national security and the Home Ministry repeatedly raised several issues in this regard, including the possibility of embedded spyware and malware in the imported equipment. The Government of India issued guidelines in 2010 stipulating that the foreign equipment suppliers   should transfer their technology to Indian manufacturers within three years, they should appoint only Indians while installing, maintaining and operating the networks for the telecom services companies  and they should deposit their software source codes in an escrow  account with an independent and trusted third party. But these prescriptions were strongly opposed by the US Government and the American and European telecom equipment manufacturers (The Chinese equipment providers did not oppose these provisions and agreed to deposit their source code in the escrow account).  Calling India’s new telecom security approval process “inflexible and unworkable”, the United States Trade Representative (USTR)  disclosed in its annual compliance report that the Indian government “suspended implementation of several of these conditions” after the US conveyed the concerns of its companies. “The issue came to a head during US President Barrack Obama’s visit. It was said then that a committee of experts would look into these concerns”. Finally the DoT was compelled to issue revised guidelines on 31-5-2011. As per these revised guidelines, the foreign suppliers need not transfer their technology, need not deposit their source code in escrow account, and need not  man the top level posts in the telecom network maintenance with Indians except a few posts like  Chief Technology Officer etc. The telecom service companies have to get their net work audited from the security point of view by a certified agency, call data  of customers must be made available along with the tracking of their location  etc are the revised guidelines.

Encouraging indigenous production?

A section of the Indian Capitalists recently realised the enormous potential for the telecom equipment market in India. In October 2008 CII and TiE (Confederation of Indian Industries and The Indus Enterpreneurs consisting of Corporates and top level professionals in Silicon Valley in America with roots in the Indus Region) published a report titled  “Investment Opportunities in Developing HI Tech ICTE Supply Chain in India”. Further, a seminar on “Developing India into a Global ICTE manufacturing Hub” was organised by CII in October 2009 in which Minister Kapil Sibal participated. This and other similar pressures spurred the Government to consider the issue of encouraging indigenous manufacture in telecom and IT sector. According to the estimates of DoT, telecom equipment worth more than Rs 3,50,000 crore will be required in India by 2015. As per the TRAI, the demand of semi conductors in India will shoot up from 1 billion dollars in 2004 to 40 billion dollars by 2015 and “ if domestic manufacture is not initiated, India will be compelled to import US $ 150 billion worth of semiconductors in next 10 years.” In case the ICTE products are continued to be imported , the  “ imports would gallop to well surpass India’s oil imports”. The TRAI initiated consultations on the issue of encouraging indigenous telecom equipment manufacturing and various proposals were submitted by various sections of the Indian and Foreign capitalists in telecom sector suiting their interests.Based on these consultations, the TRAI released its recommendations. On these recommendations of the TRAI, a round table conference was held by the Communications Minister Kapil Sibal on 5-5-2011 in which the various sections of the capitalists in telecom sector and representatives of ITI, BSNL etc have participated.

TRAI recommendations

After considering the views submitted by various players (both foreign and Indian in Indian telecom sector) and individuals, the TRAI submitted its recommendations on 12-4-2011. The following are its important recommendations:

a)      The Telecom Equipment Manufacturing Policy should be an integral and significant part of the New Telecom Policy 2011.

b)      By the year 2019-20, only 20% of the telecom equipment required for telecom services in India should be imported and the remaining 80% should be manufactured in India and in this 80% Indian manufacture, 50% should be IP(Indian product with Indian Intellectual property Right and manufacture) and remaining 30% IM(Indian manufacture with foreign Intellectual Property Right).

c)       BSNL, MTNL and all private telecom service companies like Airtel, Vodafone, Idea, TTSL etc should procure the equipment required by them as below, from IP(Indian Product Manufacturers) and IM(Indian Manufacturers) mandatorily as per the percentage given below:

In 2012-13—30%(with 25% value addition in India); In 2013-14—45%(with 35% value addition in India), In 2016-17—60%(with 50% value addition in India); and from 2019-20 onwards—80%(with 65% value addition in India)

d)      Even if the service providers (PSUs and Private Sector) outsource the installation, maintenance and operations of their network, in such case also they are responsible for maintaining the above mandate in procuring equipment from IP and IM.

e)      A Telecom Research and Development Corporation should be set up by the government and an amount of Rs 15000 crore be made available to it for setting up an R&D fund and for establishing an R&D Park. Public-Private participation be encouraged in telecom R&D.

Conflict of interests

In the consultations held by the TRAI/Minister, the private telecom services companies like Airtel etc  and the COAI(Cellular Operators Association Of India) argued that no condition should be imposed for purchasing equipment from Indian manufacturers and it should be left to their choice. If foreign equipment is costing less with high quality, they should be allowed to purchase their full requirement from foreign vendors. The TEMA (Telecom equipment manufacturers Association of India) demanded for imposing condition for procuring equipment from domestic manufacturers. The TIA-USIBC(Telecom Industry Association consisting mainly of USA’s telecom equipment manufacturers and US-India Business Council submitted a paper to TRAI demanding that there should be no condition for preferring Indian Products since it is against WTO agreements. Both the Indian and foreign telecom companies demanded for encouraging R&D in telecom in India by encouraging Public-Private partnership. The Indian and foreign big capitalists in telecom services sector and the foreign telecom equipment manufacturers are against preferential treatment to Indian telecom equipment products. On the other hand, a section of the Indian big capitalists lead by CII and also not so big capitalists lead by TEMA want preferential treatment for Indian products since they found that there is a great opportunity for exploiting the telecom manufacture in India. All of them are even for encouraging research and development in telecom sector in India, of course, with participation or domination of foreign and Indian private capital. As per the report in DoT web site on the round table conference held by the Minister Kapil Sibal, it appears that the Government is supporting the preferential treatment for Indian products to encourage Indian manufacture i.e to see that the telecom equipment market provides more opportunities for Indian capitalists in collaboration with foreign capitalists. It further appears that the Government is in favour of encouraging   private sector(Indian and foreign) in the telecom R&D.

Whether this leads to real self reliance?

The ITI (Indian Telephone Industry) in its pre-consultation paper submitted to TRAI on 29-6-2010 mentioned as below:

“The Technology for Telecom Equipment has been invariably of Foreign origin right from the days of Electro-mechanical Exchanges in the segment of Switching, Transmission and Telephone Instruments. However, these Equipments were being manufactured in India through Foreign Collaboration Agreements with leading Technology Providers, keeping in line with the Industrial Policies of the Government at relevant times. The Foreign Collaboration used to invariably cover, Transfer of Technology through know-how transfer. The introduction of Store Programme Controlled [SPC] based Digital Electronic Switching Systems in the Indian Telecom Network from early 80s, incorporated Software in the Electronic Switches. Accordingly, along with Transfer of Technology for Manufacture, Transfer of Technology also included Transfer of Software Programs (including Software Source Code) also. Accordingly, the Indigenous Industry was capable of assimilating the technology transfer and continued to give after sales service,without dependence on the Foreign Collaborator, even after the period of the Collaboration having been completed. This methodology was adopted for Transfer of Technology for E10 B Digital Electronic Switching Systems with Alcatel-CIT, France. This facilitated modernization of Indian Telecom Network

However, the Liberalized Industrial scenario enabled the Foreign Technology Providers to offer to Indian Telecom Industry, only the Right to Use the Know-how and Software programs for manufacture of Telecom Equipment, retaining the Proprietary Rights on Know-how and Software Programs (including Source Code) with Foreign Technology Provider only. This scenario resulted in perennial dependence on Foreign Technology Provider for Procurement of Software Programmes for Operation and Up-gradation of Telecom Equipment and offering after sales service. Since, the Telecom Equipment became predominantly Software dependant; the scope for enhancement of Value addition in India also has been greatly reduced. Majority of the Software being procured are Right-To-Use only, with an enormous outgo of Foreign Exchange for Procurement of both Hardware and Software from the Technology Providers, which are invariably of Foreign Origin. Setting up of the GSM Mobile Infrastructure in Indian Telecom Network had significant FE outflow towards Right-to-Use Software for Manufacture of GSM Systems [GSM-BTS by ITI with Right-to-Use Know-how from ALU] as well as Operating the GSM Infrastructure Network in BSNL and MTNL.

Action Plan: ITI opines that Government should introduce guidelines that

• Transfer of Know-how for Telecom Technology to Indian Companies should be mandatory.

• Transfer of Know-how should include Transfer of Software Programs including Software Source Code also.

This will greatly improve the manufacturing capabilities in India with reduced dependence on Foreign Technology Provider in the long run for offering after sales service also.”

But except ITI and BSNL, no other telecom manufacturer or services operator are demanding this transfer of technology. Even the stand of ITI is diluted in the meeting held by the Minister on 5-5-2011. The only talk is to encourage R&D in certain areas of telecom technology where India can start afresh and that too with foreign participation. The aim is that the Indian big capitalists in collaboration with foreign capitalists should grab the telecom equipment market and R&D  by encouraging domestic manufacture, but not real self reliance in technology.

What Self Reliance and National Security requires

*The R&D in telecom technology should be encouraged by funding the Public Sector institutes like C-DoT, TEC, ITI, BSNL, MTNL etc

*Transfer of technology should be made mandatory for the foreign equipment manufacturer on the basis of technical collaboration without equity participation with an Indian PSU manu-facturing  telecom equipment like ITI

* Telecom equipment manufacturing PSUs like ITI, HCL and Telecom Factories under BSNL should be strengthened by the Government and made the main centres for creating Indian Products in telecom equipment sector and it should be made mandatory for all the telecom service operators to procure Indian Products only.

* The diluted guidelines issued by DoT in May 2011 on the issue of ensuring national security in telecom sector should be cancelled and the earlier guidelines issued in 2010 with the conditions of technology transfer, no foreign person in higher posts in installing/maintaining/operating telecom networks and putting the source code in escrow account should be implemented. For this the Government should come out of the pressure from America and Obama.