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Telecom: The big ‘Boom’ - Views on News from Equitymaster
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  • Jul 7, 2003

    Telecom: The big ‘Boom’

    The Indian fixed line telecom segment is going through a phase of transition. The major policy reforms initiated since the introduction of the National Telecom Policy (NTP) 1999 have resulted in a significant expansion of fixed line telephony services, especially in rural India. The entry of private players has meant that customers have a variety of choices now. This has been possible because private operators are given entry without any restriction on the number of operators.

    The NTP was essentially formulated as the government recognized the telecom sector as one of the prime movers of the economy. The Government's regulatory and policy initiatives have been directed towards establishing a world-class telecommunications infrastructure in the country. The NTP 1999 focused largely on the following:

    • Making telephones available on demand achieving a total tele-density of 7 (75 million telephone connections) by FY02 and 15 (175 million telephone connections) per 100 by FY10.

    • Covering all villages in the country including rural areas at an affordable tariff structure and making rural communication mandatory for all fixed service providers.

    • Increasing rural tele-density from the current level of 0.4 to 4 by the year 2010 and provide reliable transmission media in all rural areas.

    Post NTP, 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 five decades. The rural tele-density and the urban tele-density as on March 31,2001 were 0.93 and 10.16 respectively. The total tele-density as on March 31, 2002 stood at 4.4.

    To achieve these targets as stated in the NTP 99, investment requirement of approximately US$ 37 bn by 2005 and approximately US$ 69 bn by 2010 is needed (Source: TRAI). On this note, lets have a look at the telecom FDI inflow in the last decade. The picture is not very encouraging! From 2000 to 2001 there was almost 14x increase in the inflow that has noticeably declined in the year 2002 to only 4x as compared to 2000.

    (Source: DoT India)

    The Government invited private sector participation in a phased manner from the early nineties, initially for value added services such as Paging and Cellular Mobile Telephone Services and thereafter for Fixed Telephone Services (FTS). Private sector investment has helped in bridging the resource gap to a considerable extent as was envisaged by the NTP.

    While the fixed line telephony segment has seen a significant amount of growth in the recent past, this segment is increasingly facing stiff competition from the mobile telephony segment. As seen in the graph below, the growth in new telephone connections has been slowing down since the last three years. In contrast, cellular connections saw a 63% rise in FY03. This drop in fixed lines has forced the existing fixed service providers (FSPs) into the cellular segment. Though new connections dropped but the level of penetration has been steadily escalating due to mounting penetration in the rural areas.

    (Source: CMIE)

    On the tariffs front too existing operators are facing pressure. Tariffs have been revised for calls made to cellular and WLL networks from fixed lines making them dearer but no change has been witnessed in the tariffs for local calls from fixed lines to fixed lines. The regulatory authority has provided an option to the FSPs to reduce per call minutes from 180 seconds to 120. But the FSPs facing a threat from mobile operators have opted to maintain status quo considering that if the tariffs rise further, existing subscribers may shift to mobile services.

    In FY02, BSNL constituted a lion’s share (nearly 80%) in the fixed line segment. But this figure is expected to decline over the years due greater efficiency and better services offered by the private players. Besides, the future of the FSPs is in the red and the only hope seems to be coming from concentration of the FSPs in the rural segment where fixed lines are still affordable than any other mode of communication (rural tele-density stood at over 1 per 100 in FY02). The need of the hour is to focus on creating an environment, which enables continued attraction of capital investment in the sector. In view of the fact that the level of penetration (4.4%) of fixed line services in the country is low, Indian companies still have a long way to go and the potential continues to be immense.



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