Sunrise or sunset?

Mumbai: As a part of the reform process, the Indian telecom sector was thrown open to the private sector in the mid-nineties. Research studies then showed that the industry had the capacity to grow at a record combined annual growth rate of 15 per cent over a decade. This industry, along with IT, was labelled as one of India’s sunrise industries.

Sensing the opportunity, a number of private payers like Bharti Enterprises, Hutchinson, BPL Mobile, the Tatas and, most recently, Reliance Infocomm have ventured into this sector.

Indian telecom companies basically offer two types of services:

• Cellular services. The major players in this segment are Bharti, Hutchinson and BPL Mobile — companies that use the global satellite management (GSM) standard. With this standard, telephone calls can be made to and received from any place.
• Basic services. The major players are BSNL, the Tatas and Reliance, using the code division multiple access (CDMA) standard, which offers limited mobility. Calls can be made to and received from certain fixed areas.

During the initial stages of granting licences to operators, only cellular licences were given. The licence fee was very high and a cellular operator needed much more investment as compared to the basic operator.

Reliance entered the telecom scene in December 2002 with a bang. It announced a series of rates that were way below the rates offered by the cellular operators. This has led to a price war, which now questions the basic survival capacity of some of the cellular operators.

Call war
Cellular operators have sunk in huge sums of money into their ventures. To illustrate, Bharti, which is the largest GSM provider, with a licence to operate in 16 circles, has pumped in about Rs 9,000 crore, Hutchinson about Rs 5,000 crore and BPL mobile about Rs 3,000 crore.

The return on their investments has a gestation period and they can look at profits only after that time. Thus, when Reliance Infocomm announced its rates, the calculations of the cellular operators went haywire.

The cellular operators had to bring down their rates to match the competition. But the point is, will they able to sustain their business with such low tariffs?

Many of these companies require additional funds for the new circles where licences have been issued. The resources of these operators are limited and the only way they can meet their funds requirement is through foreign direct investment (FDI).

Attracting FDI in the telecom sector has not been easy. The government permits only 49 per cent FDI in this sector. Till date, less than 10 per cent of the FDI approvals in this sector has actually entered India. Global strategic investors have shown a declining interest in India due to various reasons, such as sectoral caps, global meltdown of the telecom capital markets and an unpredictable regulatory milieu.

Bumpy road ahead
The report of the Working Group on the Telecom Sector for the Tenth Five Year Plan (2002-07) said the most important stumbling block to FDI in this sector is the mindset of the incumbent operator and the new operators. “It is, as such, crucial for all the operators to get out of their mindsets and strive to arrive at a solution and once the issues are narrowed down, it should be possible for the regulator to find a solution for the sake of the consumers.”

The second factor is uncertainty in the regulatory regime. Though things have improved vastly after the reconstitution of the Telecom Regulatory Authority of India (TRAI), the kind of regime that would replace TRAI when the Convergence Bill becomes an Act evokes concern. It is absolutely important to clarify to all the prospective investors that the migration to the convergence regime would be seamless, the report said.

Thirdly, even as disputes crop up, at least in the initial years of opening up of a sector, the dispute settlement mechanism should be able to address these issues in a speedy way.

The above measures, along with faster ‘right of way’ permissions, long-term guarantees, and the adoption of a uniform policy with ‘single window’ concept by agencies granting ‘right of way’ permissions will pave the way for speedy execution of projects and attracting FDI in this sector.

At the crossroads
The cellular industry, in the meantime, is clearly at the crossroads. Some of the smaller players are likely to fall by the wayside while others will be looking at consolidation with other players for survival.

The irony of the matter is that a recent study of the Indian telecom market conducted by the international research firm Frost and Sullivan showed that the industry is still projected to grow at a combined annual growth rate of 13.42 per cent in the next five years. This growth will take place despite the shake out in the internal telecom market, uncertainties over regulation and price wars.

During the next five years, the tele-density in India is expected to cross 10 per cent with the ongoing aggressive push of communication facilities by both private and incumbent operators, says the study.

The initiative, therefore, now lies with the government. The government needs to speedily initiate policy and legislative measures and create a level playing field for the operators and foreign investors.

Telecom is still a sunrise industry and a lot of resources have already been invested in the industry. If steps are not taken now, it will be a case of yet another opportunity lost for India.