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Getting out of the woods - Views on News from Equitymaster
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  • Oct 28, 2000

    Getting out of the woods

    In 1991, the Indian Government initiated macro-economic reforms to surmount the impending balance of payment crisis. As part of the reform process infrastructure sectors were awarded top priority. The telecom sector was amongst the first to be liberalized in December of 1991.

    The telecom reform process, however, faltered as several political, economic and regulatory roadblocks hampered further progress. The bids for cellular licenses, which were invited in December 1991, were awarded only in November 1994.

    The National Telecom Policy announced in 1994 (NTP '94) aimed at ensuring telephones on demand as soon as possible. Further, it was also directed at boosting foreign direct investments (FDI) and domestic investments in the sector. In 1997, the Government set up the Telecom Regulatory Authority of India (TRAI) to develop an effective regulatory framework.

    Despite the early advantage of sector reforms the investments did not materialise. The license fee regime made it challenging for the service providers to roll out their networks. Barring a couple, all fixed service providers (FSPs) defaulted in their network roll out commitments.

    With the NTP '94 falling short of its objectives and the emergence of converging technologies the Government formed the Group on Telecom to draft the new NTP '99. Subsequently, the new policy was implemented, which shifted the fixed service providers (FSPs) and cellular service providers to a revenue sharing mechanism from a license fee regime.

    Under the NTP '99 the FSPs pay a revenue sharing fee of 15 percent. However, the percentage share is being reviewed by TRAI and new rates are expected to be announced shortly. The percentage share for FSPs is expected to be lower than 17% prescribed for cellular service providers.

    The salient features of the new policy were to increase tele-density in the country (currently 2.6%), improve telecom infrastructure keeping in mind the convergence of technology and improve the competitive scenario within the industry. The policy also laid down a target of achieving telephones on demand by 2002 and to reach a tele-density of 7 percent by 2005 and 15 percent by 2010.

    Another important development was the tariff rationalisation plan adopted by the TRAI. The plan intended to remove the anomaly in local and long distance telephony tariffs. Consequently, the TRAI initiated a tariff rebalancing exercise, which envisages a three-phase rationalisation schedule. The regulator recently announced the second round of tariff rebalancing, which cut domestic long distance rates by 16%-20%. The new rates are effective from October 2000 to March 2002.

    However, the NTP '99 was slow to get off the ground with the regulator, TRAI, mired in controversy with the Department of Telecom (DoT) and then Mahanagar Telephone Nigam Ltd. (MTNL). But as the dust settled the telecom sector has once again gained momentum.

    The Government has announced several reforms over the last quarter. It recently opened up domestic long distance (DLD) telephony to private competition. Several players have evinced interest in entering this field. The liberalization is expected to help increase the penetration of telephony in the country, as FSP's have defaulted in their network roll out. More importantly, it offers the final user (consumers) a choice of long distance service providers.

    With the sector gathering momentum one is hopeful that the Indian telecom reforms finally show some positive fallouts.



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