(Continued from last week)
C-DoT may be insulated but...
Some observers feel that it is unlikely that telecom equipment manufacturers like C-DoT will be affected much in the event of the government phasing out duties completely. This is largely because C- DOT equipment manufacturers serve a very niche market like the rural areas. A former C-DOT official says that it will be very difficult to replace or phase out C-DoT equipment as they are very cost-effective. Moreover, they are highly suitable for Indian conditions. C-DoT switches can survive tropical heat without air-conditioning but imported switches cannot. But this segment apart, multinational vendors already dominate the market. Private service providers buy equipment mostly through vendor financing unlike the cash-rich BSNL or MTNL. And most of the MNC vendors finance purchases for private service providers. Given all this, a zero-duty WTO regime will not have any visible effect on the telecom equipment market, says the official, who now works with a leading global consultancy firm. However, it is quite likely that C-DoT too may be in for some trouble as government dismantles its preferential treatment of C-DoT when placing orders for state-owned service providers.
It is believed that equipment manufacturers (or assemblers) outside the C-DoT market will be in for a rude shock. Zero-duty in its simplest sense means cheap imports. As such, trouble awaits customer premises equipment manufacturers who have not been able to control costs and often operate with thin margin. Many of these manufacturers are already under pressure from cheap Chinese imports. These manufacturers are most likely to go through a process of reorganization and consolidation.
Used to comforts of protection for long, most of these manufacturers are wary of competition. Many of them may be wiped out. Overall, the equipment market is likely to become crowded and highly competitive.
A paper (on WTO telecommunications issues) prepared by IIM, Lucknow, noted that problems such as too many manufacturers, too many workers, too small a scale and low profit commonly exist in the production of switches, mobile communication products, optical fiber or communication terminal products in Indian telecom manufacturing industry. Some of these enterprises are on the edge of bankruptcy or operate with debts. The paper noted that with India committed to the WTO regime, local telecom manufacturing will have to face consolidation and re-organization. The paper pointed out that due to sharp reduction in tariff and removal of non-tariff barriers, MNCs may build facilities by themselves and avoid transferring technologies to India. This will challenge enterprises that have long lived on part assembling with no innovative ability.
The removal of duties can give the cellular handset market a boost. Today, most of the handsets are sold in the gray market.
This is because a 25 percent duty (duty is five per cent, countervailing duty 16 per cent, and other taxes are four percent) on these handsets makes them too costly to be bought through legal channels. As such, a tariff reduction on these could lure away buyers from the gray market, thereby benefiting the government.
Most observers agree that Indian manufacturers had enough time to put their house in order. As such, they should not be complaining now. "The tariff regime did not descend all of a sudden. Indian industry had enough time to adjust,'' a forthright Prof S Manikutty of IIM, Ahmedabad opines. He says that the Indian industry must find ways to become competitive. It does not serve anyone's interest keeping the cost of equipment high. "In fact a major reason why cellular rates in India are still so high is the cost of equipment," he points out. He suggests that the government should address issues like the high cost of capital, high cost of power, corruption and an unfavorable exchange rate policy. An optimistic Dr Manikutty is also of the view that although Indian companies have less time to catch on, they can improve their performance possibly by getting together with the help of a consortium approach.
Can India avoid WTO?
The GATS rules of telecommunications services stipulated that developing countries can impose such conditions on market access as are needed to strengthen their infrastructure and their involvement in international trade in communication services. "GATS rules allow developing countries to have limitations on market access commitments required to strengthen their infrastructure. India can take advantage of this by liberalizing in stages,'' Dr Vijaya Katti of the New Delhi-based Indian Institute of Foreign Trade says.
The same rules can also give India enough scope to reinforce restrictive measures. However, this can also prove counterproductive. "WTO rules can be as restrictive as the countries wish. Major restrictive conditions will prevent FDI and growth of a competitive communications industry," warns Prof. Manikutty. He is also of the opinion that countries like Mexico, which have permitted free market access in telecom, have benefited.
WTO regulations are something inevitable -countries can't keep postponing them forever. Paranjoy Guha Thakurta, eminent journalist with decades of experience in analyzing the political economy of the country, warns, "We have not more than two years before us." He says that the best option is to prepare ourselves for the inevitable and stop complaining. "WTO is a lesser evil, if you think it is an evil-the bigger problem is our attitude. By our own standards, we have done nothing. There is no political consensus," he adds.
Something that is inevitable must be dealt with. And as the WTO stares us in our face, three things are clear. First, as a country, we are not prepared to live in barrier-free trade regime. Second, given the declining share of the developing countries in world trade in services, it is highly unlikely that India can gain a substantial share in the global trade in the near future. And finally, whatever be their arguments, foreign investors are most likely to be guided in their investment decision by the size of the market, perceived or otherwise, than anything else.
Ravi Shekhar Pandey