There is no denying the fact that the Indian telecommunication sector has come of age. Thanks to liberalisation of telecom services -- teledensity has improved dramatically, almost doubling to around 4.4 per cent now.
At the same time, tariffs have tumbled down by as much as 50-60 per cent for long distance calls in the last couple of years alone.
After the initial hick-ups, the growth in subscriber base for cellular services has also gained significant momentum. The wireless service providers are now adding about one million subscribers every two months as compared to six months earlier, taking the total base to 9.73 subscribers by November.
What's more, the wireless segment is expected to replicate the exponential growth in subscriber base as witnessed in countries such as China.
No wonder, industry experts as well as government officials are confidently taking about not only achieving the teledensity targets set in the New Telecom Policy in 1999, but also comfortably surpassing them.
The government had envisaged a teledensity of 7 per cent by 2005 and 15 per cent by 2010.
In fact, India is touted as one of the fastest growing telecom markets in the world today. A recent report by KPMG-FICCI estimates the total fixed line base to grow at a CAGR of 21 per cent to 87 million lines over the next five years and cellular subscriber base will swell to around 75 million by 2010.
All these projections appear to be promising indeed. But the phenomenal growth in the subscriber base as envisaged in the telecom policy requires enormous amount of capital investment in the sector.
Although the estimates vary, analysts agree that even on an conservative basis the funding requirements will accumulate to around $30 billion (or Rs 1,50,000 crore) by 2010. So where will this money come from?
Certainly not from within the system. "Private sector operators will continue to remain as money guzzlers at least for the next few years, while there is a severe pressure on profitability of the incumbent operators like MTNL and BSNL," pointed out Prabhat Awasthi, regional telecom analyst, JP Morgan, on the sidelines of a conference recently held in Mumbai.
Domestic institutions also don't seems to be too keen to take such a large exposure to any single industry. Hence, a major chunk of resources will clearly have to be contributed by foreign institutions and investors.
Even in other developing countries such as China, Malaysia and others, foreign direct investment has been one of the key drivers of sustained growth in the telecom sector. In fact, the three listed Chinese telecom companies have raised as much as $23 billion of FDI in the last five years alone.
"China Mobile was the trend-setter and have raised $15.9 billion from international markets and strategic investors like Vodafone till date," pointed out Anand Ramachandran, director, Salomon Smith Barney Asia Pacific Equity research.
So can India also attract such huge amount of FDI in the telecom sector? Given the promising growth prospects of the Indian telecom sector, there is a general optimism among the investors.
More so, as there are limited investment opportunities in Europe, US and other developed countries, especially in the telecom sector.
In fact, FDI inflows have actually picked up in the last two years. According to government statistics, domestic telecom sectors received around $830 million (Rs 4,000 crore) of foreign investment in the last two years. This is over 40 per cent of the total FDI of $2 billion (Rs 9,600 crore) been pumped into Indian telecom sector in the whole of last one decade.
But this is not enough. Experts believe that there is an urgent need to resolve some key issues creating uncertainty in the telecom sector, with one of the most important being clarity in regulatory framework. There is no clear regulatory roadmap for the telecom industry.
Given the importance of regulations in determining business returns, regulatory about-turns can only result in scaring away the potential investors. And rightly so, as how can anyone possibly justify investing in an industry where rules are changes suddenly in the middle of the game?
Consider this: the government has increased much higher level of competition in the last couple of years. This is more prominent in the wireless industry where, in addition to four cellular licensees, introduction of limited mobility operators has increased the competition tremendously.
That's not all. The government has indicated that they are in favour of issuing more cellular licensees in the future.
"Investors don't have much of a problem with the higher level of competition but at least there should be some clarity about the number of players that would be allowed to offer services in a particular segment. Such uncertainties discourage foreign investors," feels Ramachandran.
This apart, establishing a clear and non-discriminatory interconnect regime is essential to attract investors.
Although unlimited competition could be beneficial to consumers, it results in immense pressure on operators. This is a key reason for many companies going under in the US as excess capital was chasing few consumers. Plus, operators tend to compromise on the quality of services.
But the situation is quite different in China where the level of competition have been highly regulated. "One of the reason why China has been able to attract large amount of FDI is because the Chinese wireless operators have not only delivered on growth but also on profitability. We expect the profits of two listed Chinese cellular companies to be around $4.8 billion in 2002," says Ramachandran.
Thus, an important step to provide impetus to cash-starved domestic telecom sector is to raise the current FDI limit from 49 per cent to 74 per cent. Leading companies such as Bharti where foreign investment is already at 49 per cent, will immensely benefit.
Not only this, many industry leaders feel FDI inflows would jump if foreign companies are allowed to take strategic stake in Indian telecom firms.
There are other bottlenecks such as no clear exist option for foreign investors, merger and acquisitions, transfer of licensee, spectrum policy and above all swift resolution of disputes which can strangle the growth of this promising industry in India.
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