Overview of Telecom Industry

The telecom industry has been divided into two major segments, that is, fixed and wireless cellular services for this report. Besides,
internet services, VAS, PMRTS and VSAT also have been discussed in brief in the report.

In today’s information age, the telecommunication industry has a vital role to play. Considered as the backbone of industrial and
economic development, the industry has been aiding delivery of voice and data services at rapidly increasing speeds, and thus, has
been revolutionising human communication.

Although the Indian telecom industry is one of the fastest-growing industries in the world, the current teledensity or telecom
penetration is extremely low when compared with global standards. India’s teledensity of 36.98% in FY09 is amongst the lowest in
the world. Further, the urban teledensity is over 80%, while rural teledensity is less than 20%, and this gap is increasing. As
majority of the population resides in rural areas, it is important that the government takes steps to improve rural teledensity. No
doubt the government has taken certain policy initiatives, which include the creation of the Universal Service Obligation Fund, for
improving rural telephony. These measures are expected to improve the rural tele-density and bridge the rural-urban gap in tele-
density.

Introduction - Evolution

Indian telecom sector is more than 165 years old. Telecommunications was first introduced in India in 1851 when the first
operational land lines were laid by the government near Kolkata (then Calcutta), although telephone services were formally
introduced in India much later in 1881. Further, in 1883, telephone services were merged with the postal system. In 1947, after
India attained independence, all foreign telecommunication companies were nationalised to form the Posts, Telephone and Telegraph
(PTT), a body that was governed by the Ministry of Communication. The Indian telecom sector was entirely under government
ownership until 1984, when the private sector was allowed in telecommunication equipment manufacturing only. The government
concretised its earlier efforts towards developing R&D in the sector by setting up an autonomous body – Centre for Development of
Telematics (C-DOT) in 1984 to develop state-of-the-art telecommunication technology to meet the growing needs of the Indian
telecommunication network. The actual evolution of the industry started after the Government separated the Department of Post
and Telegraph in 1985 by setting up the Department of Posts and the Department of Telecommunications (DoT).

The entire evolution of the telecom industry can be classified into three distinct phases.

 Phase I- Pre-Libralisation Era (1980-89)

 Phase II- Post Libralisation Era (1990-99)
 Phase III- Post 2000

Until the late 90s the Government of India held a monopoly on all types of communications – as a result of the Telegraph Act of
1885. As mentioned earlier in the chapter, until the industry was liberalised in the early nineties, it was a heavily government-
controlled and small-sized market, Government policies have played a key role in shaping the structure and size of the Telecom
industry in India. As a result, the Indian telecom market is one of the most liberalised market in the world with private participation
in almost all of its segments. The New Telecom Policy (NTP-99) provided the much needed impetus to the growth of this industry
and set the trend for libralisation in the industry.
Current Status

Globalisation has made telecommunication an integral part of the infrastructure of the Indian economy. The telecom sector in India
has developed as a result of progressive regulatory regime.

According to the TRAI, the total gross revenue of the Indian telecom services industry was Rs 1,524 bn in FY09 up from Rs 1,291 bn
in FY08 registering a growth of 18.03% over FY08 and its subscriber base grew by 43% over FY08 to touch 429.70 mn subscribers
in FY09.
The telecom sector in India experienced a rapid growth over the past decade on account of regulatory libralisation, structural
reforms and competition, making telecom one of the major catalysts in India’s growth story. However, much of this growth can be
attributed to the unprecedented growth in mobile telephony as the number of mobile subscribers grew at an astounding rate from
10 million in 2002 to 392 million in 2009. Besides, the growth in the service and IT and ITeS sector also increased the prominence of
the telecom industry in India. Telecom has emerged as a key infrastructure for economic and consumer growth because of its
multiplier effect and the fact that it is beneficial to trade in other industries. The contribution of the sector to GDP has been
increasing gradually (its contribution in GDP has more than doubled to 2.83% in FY07 from 1.0% in FY92).

Telecom is one of the fastest-growing industries in India; on an average the industry added 8 million wireless subscribers every
month in FY08. The government had set a target of 500 million telecom connections by 2010. However, according to the TRAI, the
total subscriber base (wireless and wireline) in the industry crossed the 500-mn-mark and reached 509.03 mn by the end of
September 2009, which took India to the second position in terms of wireless network in the world next only to China. Prior to
liberalisation, the telecom sector was monopolised by the public sector and recorded marginal growth; in fact, during 1948-1998,
the incremental teledensity in the country was just 1.92%. However, the introduction of NTP’99 accelerated the growth of the sector
and the teledensity increased from 2.33 in 1999 to 36.98 in 2009; however, much of this growth was brought about by the NTP-99
policy changes such as migration from fixed license fee to revenue sharing regime and cost-oriented telecom tariffs. From 2003
onwards the government has taken certain initiatives such as unified access licensing regime, reduced access deficit, introduction of
calling party pays (CPP) and revenue sharing regime in ADC that has provided further impetus to the sector.

The Indian telecom industry is characterised with intense competition, and continuous price wars. Currently, there are around a
dozen telecom service providers who operate in the wired and wireless segment. The government has been periodically
implementing suitable fiscal and promotional policies to boost domestic demand and to create volumes for the industry.

The Indian telecom industry has immense growth potential as the teledensity in the country is just 36 as compared with 60 in the
US, 102 in the UK and 58 in Canada. The wireless segment growth has played a dominant role in taking the teledensity to the
current levels. In the next few years, the industry is poised to grow further, in fact, it has already entered a consolidation phase as
foreign players are struggling to acquire a pie in this dynamic industry.

Role in India’s Development

Contribution to GDP

According to the UNCTAD, there is a direct correlation between the growth in mobile teledensity and the growth in GDP per capita in
developing countries, which tend to have a high percentage of rural population. The share of the telecom services industry in the
total GDP has been rising over the past few years (the telecom sector contribution in GDP went up from 2.52% in FY05 to 2.83% in
FY07).
Employment

The Indian telecommunication industry employs over 400,000 direct employees and about 85% of these employees are from
government-owned companies. The ratio of number of subscribers to employees, an indication of efficiency and profitability, is much
higher for private companies than for government companies.

Foreign Direct Investment (FDI)

Foreign direct investment has been one of the major contributors in the growth of the Indian economy, and therefore, the need for
higher FDI is felt across sectors in the Indian economy. The telecom sector has played a crucial role in attracting FDI in India. The
share of telecom sector in the total FDI inflows in India has gone up to 10% in FY09 as compared with just 3% in FY05.

The telecom sector requires huge investments for its expansion as it is capital-intensive and FDI plays a vital role in meeting the
fund requirements for expansion of the telecom sector. Telecom accounts for almost 10% of the total FDI inflows in the country and
has been the third-largest sector to attract FDI in India in the post-liberalisation era

The Indian telecom industry has been an attractive avenue for foreign investors over the years. As per DIPP figures, the cumulative
FDI inflow during August 1991 to June 2009 period, in the telecommunication sector amounted to US$ 113 bn. FDI calculation takes
into account radio paging, cellular mobile and basic telephone services in the telecommunication sector.

In the 2004-05 Budget, the government raised the FDI limit from 49% to 74% in the telecom services segment subject to retention
of local management control. According to the new norms, 26% share out of the 74% should be held by an Indian company or an
Indian citizen with Indian management. Further, 100% FDI is permitted in telecom manufacturing, category I infrastructure
providers, ISPs without gateway, call centres and IT-enabled services. Further, direct or indirect FDI up to 74% is permitted subject
to licensing and security requirements for ISPs with gateways, radio paging operators and category II infrastructure providers.

The relaxation in FDI norms has attracted many foreign telecom majors to the sector. The presence of foreign players has not only
encouraged faster infrastructure development and upgradation but also has opened up the domestic industry to foreign competition.
Since 2004, there has been a large inflow of FDI in the sector. During 2004-05 and 2005-06, a period during which the FDI norms
were relaxed, the FDI inflow grew by an astounding 300% to US$ 624 mn in 2005-06 from merely US$ 125 mn in 2004-05. The
inflow of FDI has provided tremendous impetus to the sector in the past few years and the attractiveness of the sector has kept the
FDI inflows growing steadily. During FY09 the FDI in the telecom sector at US$ 2,558 mn was 103% higher than that seen in FY08
at US$ 1,261 mn. Further, the FDI in the sector has already reached US$ 2010 mn for a six month period of FY10 (Apr-Sep 09) and
is expected to surpass the total FDI for FY09.

The government’s liberalised FDI policies have resulted in several foreign companies entering into the Indian markets. The influx of
foreign players in the Indian telecom industry has led to capacity creation, and better infrastructure, which in turn has bettered the
network quality. The rise in FDI has also enabled technology transfer, market access and has improved organisational skills; going
forward, FDI could be used for providing telecom services to rural areas, where teledensity is still very low.

The change in FDI policy that has raised the FDI limit from 49% to 74% for the sector has made it more attractive for foreign
players. In the long run the growth prospects of telecom players that have foreign partners will improve and other players will get
new avenues to raise capital.

Growth of IT-ITeS and Financial Sector

India has entered the league of countries with the most-advanced telecommunication infrastructure after the industry was
deregulated. Furthermore, deregulation has stimulated India’s economic growth through industry growth and through rise in
investments. It is evident that a well-developed communication sector improves access to social networks, lowers transaction costs,
increases economic opportunities, widens markets, and provides better access to information, healthcare and educational services.
The growth in Indian telecom sector has been concomitant with overall growth in GDP, government revenue, employment et al.
Besides, telecommunication has increased efficiency, reduced transaction costs, attracted investments and has created new
opportunities for business and employment.

The NTP-99 was particularly helpful for the ITeS-BPO industry as it ended the government monopoly in international calling by
introducing IP telephony. After the introduction of IP telephony, there was rapid growth in the number of data processing centres
and inbound/outbound call centres, which ultimately led to the outsourcing revolution in India.

The telecom sector has been instrumental in creating jobs for a vast pool of talented and knowledge professionals in the IT and
ITeS-BPO industry, which thrives on reliable telecommunication infrastructure. India has become an important outsourcing
destination for the world and the boom in this sector also has transformed India’s economic dynamics. The evolution of telecom
sector has brought about a revolutionary change in the way some businesses operate.

Another beneficiary of the telecom revolution is the financial services industry, which has been on a growth trajectory. The progress
and quality of the financial sector has been a key factor that has driven the pace and diversity of the real economy. India has an
extensive and well-developed financial sector with wide and sophisticated banking network. Banking in India has become service-
oriented, and has matured greatly from the days of walk-in customers to the present situation when banks have migrated to a 24-
hour banking platform to attract customers; however, this disintermediation in the business has led banks to be extremely prudent
in terms of their internal operations and has led them to adopt newer products and delivery channels. Further, with introduction of
internet & mobile banking the long ques at the banks are slowly becoming a thing of the past.

Both the financial and the IT-ITeS segments rely on good domestic as well as international network connectivity; therefore, there is
a need for a sound telecommunication network.

Factors Facilitating Growth of the Sector

The phenomenal growth in the Indian telecom industry was brought about by the wireless revolution that began in the nineties.
Besides this, the following factors also aided the growth of the industry.

Libralisation

The relaxation of telecom regulations has played a major role in the development of the Indian telecom industry. The liberalisation
policies of 1991 and the consequent influx of private players have led the industry on a high growth trajectory and have increased
the level of competition. Post-liberalisation, the telecom industry has received more investments and has implemented higher
technology.

Increasing Affordability of Handsets

The phenomenal growth in the Indian telecom industry was predominantly aided by the meteoric rise in wireless subscribers, which
encouraged mobile handset manufacturers to enter the market and to cater to the growing demand. Further, the manufacturers
introduced lower-priced handsets with add-on facilities to cater to the increasing number of subscribers from different strata of the
society. Now even entry-level handsets come with features like coloured display and FM radio. Thus, the falling handset prices and
the add-on features have triggered growth of the Indian telecom industry.

Prepaid Cards Bring in More Subscribers

In the late nineties, India was introduced to prepaid cards, which was yet another milestone for the wireless sector. Prepaid cards
lured more subscribers into the industry besides lowering the credit risk of service providers due to its upfront payment concept.
Prepaid cards were quite a phenomenon among first-time users who wanted to control their bills and students who had limited
resources but greater need to be connected. Pre-paid cards greatly helped the cellular market to grow rapidly and cater to the
untapped market. Further, the introduction of innovative schemes like recharge coupons of smaller denominations and life time
incoming free cards has led to an exponential growth in the subscriber base.

Introduction of Calling Party Pays (CPP)

The CPP regime was introduced in India in 2003 and under this regime, the calling party who initiated the call was to bear the entire
cost of the call. This regime came to be applicable for mobile to mobile calls as well as fixed line to mobile calls. So far India had
followed the Receiving Party Pays (RPP) system where the subscriber used to pay for incoming calls from both mobile as well as
fixedline networks. Shifting to the CPP system has greatly fuelled the subscriber growth in the sector.

Changing Demographic Profile

The changing demographic profile of India has also played an important role in subscriber growth. The changed profile is
characterised by a large young population, a burgeoning middle class with growing disposable income, urbanisation, increasing
literacy levels and higher adaptability to technology. These new features have multiplied the need to be connected always and to
own a wireless phone and therefore, in present times mobiles are perceived as a utility rather than a luxury.

Increased Competition & Declining Tariffs

Liberalisation of the telecom industry has fuelled intense competition, especially in the cellular segment. The ever-increasing
competition has led to high growth of subscribers and has put pressure on tariffs, which have seen a sharp drop over the years.
When the cellular phones were introduced, call rates were at a peak of Rs 16 per minute and there were charges for incoming calls
too. Today, however, incoming calls are no longer charged and outgoing calls are charged at less than a rupee per minute. Thus, the
tariff war has come a long way indeed. Increased competition and the subsequent tariff war has acted as a major catalyst for
attracting more subscribers. Apart from these major growth drivers, an improved network coverage, entry of CDMA players, growth
of value-added services (VAS), advancement in technology, and growing data services have also driven the growth of the industry.

Outlook

The telecom industry in India has experienced exponential growth over the past few years and has been an important contributor to
economic growth; however, the cut-throat competition and intense tariff wars have had a negative impact on the revenue of players.
Despite the challenges, the Indian telecom industry will thrive because of the immense potential in terms of new users. India is one
of the most-attractive telecom markets because it is still one of the lowest penetrated markets. The government is keen on
developing rural telecom infrastructure and is also set to roll out next generation or 3G services in the country. Operators are on an
expansion mode and are investing heavily on telecom infrastructure. Foreign telecom companies are acquiring considerable stakes in
Indian companies. Burgeoning middle class and increasing spending power, the government’s thrust on increasing rural telecom
coverage, favourable investment climate and positive reforms will ensure that India’s high potential is indeed realised.