TELECOM INDUSTRY IN INDIA: A DIAGNOSIS
G Bharathi

Introduction:

One of the important components of the information technology industry is the telecommunication industry. If the economy has to progress in the area of IT then the telecom sector can never be neglected. After the economic reforms and opening up of the telecom sector to private participation, the industry has shown several changes not only in terms of the number of services provided but also in terms of the quality provided to the customers. One of the important aspects that have changed is the pricing strategy adopted by players due to intense competition especially in the cellular segment. The main objective of this article is to analyze the changes that have taken place in the industry over a period of time. It also emphasizes the nature of the competition and the pricing strategies that have emerged over this period.

Indian telecom sector is one of the fastest growing segments and constitutes one of the world’s largest telecom markets. The Indian telecom industry is the eighth largest in the world and the second largest among emerging economies. However, with a fixed telephone network of 40 million lines, India is ranked as one of the top ten-telecom networks in the world, its telephone density of 4.8 telephone lines per 100 persons compares unfavorably with global standards. The US has a tele-density of 50 telephone lines per 100 persons; Brazil has a tele-density of 10 telephone lines per 100 persons with the global average being 11 per 100. The importance of the telecom sector can also be seen from the policy stress on this sector that has been given over the last few years.

The industry has witnessed an explosive growth in recent years. Tele-density has more than doubled from 2.3 percent in 1999 to 4.8 percent in 2002. The Indian telecom market size of over US$8 bn. is expected to increase three-fold by 2012. The current low tele-density offers telecom companies substantial growth opportunities in India and gives the country an option of adapting new technologies. The New Telecom Policy of 1999 (NTP 99) has set a target of increasing tele-density to 15 per cent by 2010.

The demand for fixed telephone lines is expected to increase at a CAGR of 12 per cent, from around 38 million DELs in end March 2002 to around 67 million DELs in end March 2007. The incremental growth of telephone lines is expected largely from the semi-urban and rural areas. In the metros, growth rates in telephone lines are not expected to be high, due to the high Tele-density, high penetration of cellular to fixed lines, and high average household penetration of telephones.

The policy is achieving a near stabilization in recent times. The pricing has chaged drastically from that of skimming to that of penetration.  Gradually, market forces, rather than the policy, would determine the realignment of tariffs with costs, due to increasing competition, introduction of alternative technologies and services, and the removal of policy barriers controlling the industry structure. However, one trend that is quite evident is that the prices have shown a downward trend and this tariff is expected to decline further, due to expected increase in competition. The table below give a basic comparison of Indian scenario with that of other countries.

Table 1

     Source: Confederation of Indian Industries.

The monthly subscription charges for residential subscribers and charges for local calls, in India, are comparable to those in Malaysia and Brazil. However, in India, the subscription charges for commercial subscribers are significantly lower as compared with those in the other countries.

Here is some of the basic statistics about the Indian telecom industry presented in Table Number 2

TELEPHONE NETWORKS STATUS AS OF DECEMBER 2003

Table 2

Source: www.uktradeinvest.uk

The major players in the market are Bharti, Hutch, Tata, BSNL, Idea and Reliance. This is boom time for the consumers, who have been paying among the world's highest tariffs so far. Due to intense competition, last year saw a considerable rationalization of tariffs. This is reflected in the growth of industry. Though the subscribers increased by 100%, revenues are growing at an approximate rate of 23%.

Following are some of the important characteristics of Indian Telecom Market

Size of the Market

India has one of the fastest growing telecommunication systems in the world. The Indian communications services industry has crossed the Rs 5,00,000  Given the low telephone penetration rate, India offers vast scope for growth. Telephone lines added to the basic services network over the last 5 years have been one and a half times that added over the preceding fifty years. Some basic information is given below in Table 3

The Indian Communications Service Industry

Table 3

Source: www.uktradeinvest.uk

Market Trends

The telecom industry continues to be on a roll, led largely by a boom in cellular telephony, although growth of landline phones and internet connections continue to be 'held up'. Cellular telephony growth was is very fast. According to JM Morgan Stanley, the cellular segment will be key growth driver for the Telecom services market in India. The share of public operators in this market is likely to diminish and competition would establish itself faster and get a bigger chunk of the market. This would be led by further liberalization, increasing customer expectations, convergence of technologies & the ability of private players to offer it to the market faster than the incumbent operator.

Main Competitors

The competition varies across segments but the current players include state-owned operators as well as private operators, operating on the basis of a level-playing field'.

Top 10 Telecom Service Providers

Table 4

Source: www.uktradeinvest.uk

Constraints

The major constraints that operate in the Indian Telecom market can be put in the following points

• Firstly, though the reform process is going in the right direction, the Government could further increase the pace.

• Secondly, it would be difficult to make in-roads into the semi-rural and rural areas because of the lack of infrastructure. The service providers have to incur a huge initial fixed cost to make inroads into this market. Achieving break-even under these circumstances may prove to be difficult.

• Thirdly, the sector requires players with huge financial resources due to the above mentioned constraint. Upfront entry fees and bank guarantees represent a sizeable share of initial investments. While the criteria are important, it tends to support the existing big and older players. Financing these requirements require a little more liberal approach from the policy side.

• Lastly, there is also a problem of limited spectrum availability and the issue of interconnection charges between the private and state operators.

Investments

The leading Indian telecom companies are expected to spend 13.71 billion over the next 5 years. Given below is a glimpse of the magnitude of investment the existing players are willing to make in the next few years.

INVESTMENT

Table 5

About 73 percent of the estimated investment is likely to be on the development of urban network, while the remaining 27 percent will be invested on rural network. The telecom sector has attracted the second largest FDI in India after the Energy sector

The opportunities that are emerging in various market segments of this industry are mainly in that of fixed service provider (FSPs), Cellular Mobile Telephone Service (CMTS), Internet Service Provider (ISP), International Long Distance Services (ILD), National Long Distance Services (NLD), Global Mobile Personal Communication by Satellite (GMPCS) Service, Very Small Aperture Terminal (VSAT) Service and Public Mobile Radio Trunked Service (PMRTS). The other services available are Paging Services, Value added services, Voice Mail & Audiotex Service.

However, as mentioned earlier the industry continues to face a number of bottlenecks in terms of regulatory treatment of ISPs, high bandwidth prices, low PC penetration, high cost of telephone access etc.

Finally it can be said that al said and done, clearly, Indian telecom is gathering steam. But at the same time competition is also getting intense, leading to drops in prices and margins. This is the time for creating as conducive a business environment as possible. The Government must play its role to see that hurdles to business and market uncertainties are removed. The role of not just the Government, but the regulator is going to be very critical in days to come. And operators will need to spend quite a bit of their top management time dealing with policy issues.

A lot of money is going to be needed to fund such growth in the coming years too. Surely, as operators will look at FDI and other sources of funds, the pressure on bottom-line will only increase. In a pre-consolidation phase, there would not be too many betters on operators that do not have operating efficiencies. And the toughest challenge would be in planning for partnerships, as pressure on issues like intra-circle mergers and FDI limits in telecom start building up. These partnerships could be in the form of mergers and acquisitions or even cartels.

Besides competition for numbers the players will have to be matching themselves with others by improving the quality of service. While we saw a great increase in the number of subscribers last year, there was a general perception that there was a decline in service quality. Operators, besides fighting and lobbying with the Government, will need to focus more on network expansion and quality, customer service, and modernization. Just connectivity will not help. Cost-effective value-added services are soon going to be the differentiator.

Thus, the big boom is here to stay.

G Bharathi,
Faculty in Economics,
Aurora’s Post Graduate College,
Chikaddpally, Hyderabad- 500020.
The Author can be reached at bharathishan@rediffmail.com