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| BW OPINION |
| L'affaire Nokia |
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IN the Nokia episode,
neither the government nor the Finnish company has
covered itself with glory. The industry ministry
believes Nokia ought to be manufacturing its handsets
here given the booming demand and the company's
own demand projections for cellphone usage. Although
Nokia Networks' president Sari Baldauf has quoted
figures of 100 million cellphone users in 2-3 years,
it now says the demand is not enough to justify
such a venture.
Let's look at some of the numbers. In the first
half of 2003, the number of cellphone users increased
by 10 million. Extrapolated, this means 20 million
new users in 2003. This is not necessarily a net
increase in the number of phone users in India because
some subscribers have switched from landlines to
cellphones and probably around 2 million landlines
have been surrendered. Nevertheless, compared with
a total of 1 million subscribers in 2002, cellphone
usage has undoubtedly exploded and should increase
now that the policy mess has been sorted out.
Whether 20 million or 100 million is large enough
for a company to contemplate manufacturing is the
company's decision; no government has any business
to dictate terms on such commercial matters. For
a start, Nokia's share in this market is uncertain.
India may have locational advantages such as abundant
supply of labour. But labour costs account for a
small component of cellphone manufacturing costs.
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| Nokia and
the government are both at fault—
the former for seeking and the
latter for giving preferential
treatment. |
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That apart, India's comparative disadvantages like
inadequate infrastructure, complicated procedures
and labour market rigidities are legion. Reforms
could lower these costs, but there is also the prospect
of tariffs on handsets being reduced to 0% in 2005,
thus eliminating the tariff-jumping objective of
setting up manufacturing capacity in India. With
zero tariffs and low transaction costs, the size
of the home market would become irrelevant. If India
has locational advantages, the company would look
at India as a manufacturing base, not just to cater
to the domestic market, but also for exports.
Be that as it may, the government does have a point.
Nokia itself distorted the logic of commercial decision-making
by asking for preferential treatment. This has gone
well beyond the test-marketing period that Nokia
was granted in 1997. One would have thought that
six years was more than enough for test marketing.
Not just this, it had also sought permission for
wholesale trading.
This is where the policy rub comes in. A wholesale
trading licence requires manufacturing in India
as quid pro quo. One could say that wholesale trading
should be open to all and not to specific companies,
and the policy is faulty. But there is no denying
the contractual element in it that bound Nokia to
begin manufacturing.
Not content with granting special permission to
Nokia, the industry ministry compounded the error
by waiving the manufacturing requirement because
the Indian market was thought to be too small. Or
so Nokia would have us believe.
Naturally, the industry ministry is peeved and wants
the finance ministry to scrap Nokia's licence. That
is not the issue. Small and big are subjective terms
and can be argued over endlessly. But there is the
issue of consistency. Nokia India cannot tell the
government that India is a small market when the
president of its parent claims the market is about
to explode. It is obvious that Nokia wants special
incentives to set up manufacturing capacity in India.
And in seeking special treatment, including, perhaps,
fiscal incentives and even protection, foreign companies
are no different from Indian ones. There is merit
in the level playing field argument if that is interpreted
in the limited sense of national treatment across
Indian and foreign companies.
Yes, the obstacles to doing business in India need
to be eased and the environment improved for all
investments. But there is no need to bend over backwards
or offer special concessions to attract foreign
direct investment, whether it is from Mauritius
or from non-resident Indians and overseas corporate
bodies.
The message of liberalisation is to end special
and differential treatment. Yet, on every occasion
when the reform process has stumbled and resulted
in scams, it is on account of favoured treatment.
Nokia's special wholesale trading licence ought
to be revoked immediately and wholesale trade opened
up in general. Let the industry ministry make its
own projections for handset demand. If the Indian
market is too small, no company will manufacture
in the country and India will import all the handsets
it needs. If, on the other hand, the market is large,
Nokia itself will manufacture.
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