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Consumer centric policies to fuel growth… - Views on News from Equitymaster
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  • May 26, 2001

    Consumer centric policies to fuel growth…

    India’s basic telephony penetration crossed the 3 percent mark last year. The National Telecom Policy 1999 (NTP-99) has envisaged a penetration level around 7 percent by 2005. By 2010, tele-density is expected to go up to 15 percent. Rural tele-density at the same time is expected to touch 4 percent from the current level of 0.6 percent. Though these are achievable targets, previous telecom policies have failed to meet the targeted tele-density.

    The slew of measures initiated by The Telecom Regulatory Authority of India (TRAI) in the last one year has actually paid-off. Or so it seems. While the cellular subscriber base has gone up by 96 percent in 2001, the tele-density has also gone up from 2.6 percent to 3 percent. In 2002, tele-density is expected to register even higher growth. The reason: Wireless in Local Loop (WiLL) is finally here.

    WiLL means that companies like MTNL, Hughes Tele and Bharti, which provide basic telephony services are allowed to provide limited mobility to their customers. Since Fixed Service Provider (FSPs) can provide such services in a short distance charging area (SDCA) cellular service providers are at a big disadvantage. SDCA would typically mean a local call area. Since all the metros are SDCAs, a user can avail of the WiLL service, which will allow mobile communication facility, for say, entire Mumbai! TRAI has also fixed the user charges at Rs 1.20 for 180 seconds. Currently, FSPs are providing only fixed WiLL services.

    The Cellular Operators Association of India (COAI) has opposed TRAI’s move allowing FSPs to provide WiLL services. The reasons are three fold. One, this will provide the FSPs a back-door entry into the cellular segment. Two, since airtimes charges are significantly lower, both the existing as well as new cellular subscribers could opt for WiLL service adversely affecting cellular subscriber growth. Another reason cited by the CSPs is that any type of mobility can be offered to subscribers only under the license granted for mobile services, which FSPs do not have. Besides, FSPs are of the view that FSPs can extend the scope of mobility and provide mobility throughout the circle.

    However, all the telecom companies have agreed to the National Telecom Policy 1999, which states that there will be no protection by the terms of their license. TRAI is of the view that though demand for WiLL is expected to create a dent in the CSPs profitability for the first two years, in the long run the advantages would be evened out. This is because as competition creeps in, cellular airtime charges will also decline thus reducing the attractiveness of WiLL based services. Already cellular airtime charges are on the decline with the entry of public sector undertakings.

    Also, if the fourth CSP were to enter in each of the circles, which is expected soon, competition will increase. This will lower the airtime charges. Added to this, CSPs can provide a host of other services like short messaging services and WAP, which WiLL based systems cannot offer. WiLL is also expected to succeed only if the subscribers are willing to buy an instrument, which costs as much as mobile handsets.

    But to lower the impact of WiLL on CSPs, TRAI has reduced the annual revenue sharing of cellular operators from 17% earlier to 12%. In a study conducted by the TRAI, it was estimated that despite lower rates, at the revised revenue share CSPs would be able to generate a return on equity of more than 20 percent.

    Telecom FDI- A break up
    Service % of FDI
    Cellular telephony 48.4%
    Holding companies 21.5%
    Manufacturing 17.4%
    Basic telephony 6.2%
    Others 6.6%
    Total 100.0%

    While previous NTPs have failed to achieve the tele-density targets, NTP-99 seems to have focus, which otherwise was lagging. Hitherto, the reason for the slow progress of basic telephony penetration has been higher cost of equipment and slow progress of public sector telecom companies. The gradual reduction in customs duty on telecom equipment and low interest rates have enthused both the domestic as well as the international players. The cumulative Foreign Direct Investment (FDI) inflow in the Indian telecom sector has crossed Rs 43 billion (US$ 914 million) mark. It is also estimated that the FDI in this sector would cross US$ 37 billion by 2005 and US$ 69 billion by 2010. So, the recent development on the telecom policy front is encouraging. This may not increase tele-density but could augur well for the Indian consumer, who has been deprived of anything better till now.



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