The Hindu Business Line : Still in the air

THE bullishness in the telecom industry is palpable. To add to this bullish fervour, a recent study by Ernst & Young has concluded that the Indian telecom market is poised to become the second largest in the world after China over the next five years. The study says that industry revenues are expected to witness a three-fold rise from $9 billion to $25 billion and the subscriber base is estimated to cross the 20-crore mark by 2007 and 25 crore in the next couple of years thereafter.

The stimulus for the robust industry growth has been provided largely by the mobile segment. This segment has been adding nearly 1.5 to 2 million subscribers every month over the past six months. To sustain this growth momentum and for these initiatives to make a material difference to the mobile sector, the telecom sector will have to work with the Government to complete the unfinished agenda in areas such as:

Availability of spectrum

: The availability and cost of frequency spectrum holds the key to the quality of services offered by a mobile operator. At present, GSM-based cellular operators have been allocated spectrum ranging from 4.4 Mhz to 10 Mhz based on certain criteria, including subscriber base, whereas CDMA-based operators have been assigned 2.5 Mhz spectrum subject to a maximum of Mhz. This is considerably lower than the spectrum allowed in EU countries that averages 18 Mhz per GSM operator and 14 Mhz in Asia-Pacific countries.

In India, we find that in the case of GSM-based subscribers, with the exception of metros, practically all the operators have been allocated only 6.2 Mhz of spectrum. With the subscriber base being added at a frenzied pace and incoming calls putting a load on the spectrum, a need for review and enhancement has become imperative. The Telecom Regulatory Authority of India has been working on the guidelines for the efficient utilisation, allocation and pricing of spectrum for the past three months. This will be critical to the growth of the industry in the foreseeable future.

Hike in FDI ceiling: The security concerns of the Government have ensured that the foreign direct investment (FDI) ceiling (including the FII portion) remains locked at 49 per cent. Though the Communications Minister had assured the cellular operators in late December that the FDI (in particular, the FII stake) will be raised from 49 to 74 per cent, some arms of the Government have differed on this issue. Indications are that this decision will be taken only after the general elections.

Clearly, if the ambitious targets for mobile growth have to be met, FDI (and FII) ceilings will have to be relaxed at the earliest. The actual FDI flow into the telecom sector shows that it peaked in 2001 with an inflow of Rs 3970 crore and has declined sharply to Rs 1081 crore in 2002 and further to Rs 286 crore till October 2003. With the policy bottlenecks and regulatory risks being removed one by one, the telecom environment can be made more attractive for FDI investments. More so, as the ability to raise investments through IPOs proposed by all the three major operators — Reliance Infocomm, Idea Cellular and Hutchison — may be constrained by the liquidity sucked out of the system by the recent barrage of offers for sale by ONGC, GAIL and IBP, among others.

Direct inter-circle connectivity

: Sooner or later, the Government will have to allow cellular operators with a national footprint or operating in contiguous (adjacent geographical areas) to carry their own long distance calls without the help of a long distance operator. Bharat Sanchar Nigam, the incumbent, is fundamentally opposed to this move as it will have a major impact on its long distance revenues and, in turn, its bottomline. But in the interest of allowing more affordable long distance services to consumers and optimal utilisation of the mobile infrastructure, the Government will have to consider relaxing this requirement at the earliest. It will also help the industry to move quickly towards a unified regime for all telecom services, including long distance.

Lower revenue share: In late December, the Government effected an across-the-board 2 per cent reduction in revenue share for metros and circles. This, along with an additional 2 percentage point reduction in revenue share for the first and second GSM operators in all circles except metros for a four-year period, is indeed a welcome development.

But the Government has to go a step further and evolve a time-bound plan to reduce the current revenue share to bring it in line with international norms of under 5 per cent. As a first step, the Government can at least concede to the industry's and TRAI's definition of `adjusted gross revenues' to reflect the core business of the operators. This is expected to result in lower revenue outgo for the operator and translate into further decline in tariffs and superior quality of service from the mobile operators.

In a nutshell...

Bottlenecks resolved...

The introduction of unified access licence that removed the distinction between GSM mobile and CDMA-based limited mobile services.

Lower revenue share on transition to the unified access regime for both GSM and CDMA-based operators

The revised interconnection regime, the lifeblood of the telecom sector, came into effect from February 1.

Ushered in the free incoming call regime.

Intra-circle merger guidelines were announced recently, paving the way for consolidation in the industry

...and the unresolved ones

Efficient availability, allocation and pricing of frequency spectrum.

Raising the FDI (or at least the FII stake) ceiling from 49 to 74 per cent.

Allow direct inter-circle connectivity.

Lower revenue share further.