India's telecom sector is exhibiting strong growth. At the centre of developments is a novel 'almost anything goes' regulatory regime... 

Perhaps typical of India's current approach to the sector is this month's decision to raise the limit on the Foreign Direct Investment (FDI) permissible for telecom operators from 49% to 74%. The main aim of this relaxation, as stated by Communications Minister Dayanidhi Maran, is to find fresh sources of finance for the country's rapidly expanding mobile operations. It's calculated that some US$20bn will be required to further expand wireless networks in the short term, and national investors aren't thought to be capable of stumping up this kind of money by themselves.

FDI relaxation isn't all about governmental 'give', though. The 'take' elements are that state approval will still be required for foreign investors to raise holdings above the previous 49% cap, that most key company executives need to be Indian nationals, and that the requisite main Indian shareholder needs to hold at least 10% of the company. So, in effect, it's liberalisation without going to the max.

The drivers of telecommunications expansion in India aren't difficult to fathom. First off, the population is approaching the 1.1bn mark and there is huge unsatisfied demand for basic telecommunications access. According to new data released by the Telecom Regulatory Authority of India (TRAI), at the end of January 2005 the number of gross national fixed and mobile subscriber connections reached around 95 million: this equates to a relatively modest tele-density of 8.8%.

Wireless steps up to bat
In practice the use of wireless and cellular to furnish basic access has eased past that of wireline. The TRAI figures indicate that at the end of January 2005 mobile phone subscribers numbered around 50mn, or nearly 53% of all connections. One current estimate is that the Indian mobile market is growing at over 40% per annum; another sees the number of mobiles in use doubling to 100mn this year, and then doubling again by 2007. Either way, though, mobile penetration itself remains low, as emphasised by the inevitable comparison with neighbouring China: 6% compared to around 26% in 2004.

Although you're obviously not comparing like with like, many experts believe India has the potential to develop in a similar fashion and close the mobile gap with China. In its 2004 white paper 'The Indian Telecommunications Experience: Its Relevance For The World', The Shosteck Group consultancy observed: 'in the view of many, India is entering an era of economic growth that, like China, will lift it into the ranks of fully developed nations – leading to 200mn to 250mn or more mobile subscribers within the near-to-mid term.

Others, however, question this optimism. They point to India’s relatively low income per capita, continuing bureaucratic restraints on markets, onerous public debt, and shabby infrastructure'.

"We reject the latter perspective. True, more factors inhibit the growth of India than that of China. Nonetheless, forces are at play – regulatory, economic, and market – which assure accelerating growth and Indian consumers adopting mobile communications as rapidly, and plausibly more rapidly, than have those of China", stated Dr Herschel Shosteck, group president and chairman.

Economy driver
At present India's economy looks to be in quite reasonable shape. Asia's fourth largest economy, the country grew at over 8% in the last financial year and is expected to notch up somewhere around 7% in the current year ending in March.

Growth of economic activity is helping to increase demand for broadband, IP, multimedia and value-added wireline and wireless services. VoIP has been available for some years, and major broadband roll-outs are underway. For example, India's larger established telcos such as Bharat Sanchar Nigam Ltd (BSNL), and Mahanagar Telephone Nigam Limited (MTNL) have recently begun large deployments of xDSL networks. IP-VPNS and MPLS networks are on the increase, and there have been some ambitious multimedia service start-ups. A reported goal of the Indian authorities is to have 6mn Internet and 3 mn broadband users by the end of this year.

More investor-friendly
As exemplified by the FDI relaxation, the Indian government and telecom regulator are now more investor-friendly and more market-orientated than in the past, but stop short of the laissez-faire arrangements found in other countries. This is not a criticism - it seems to suit and is to a degree a reflection of political realities in the country.

Thus BSNL, formerly the operational arm of the Department of Telecommunications, has been corporatised. The former government-owned international operator Videsh Sanchar Nigam Limited (VSNL), is partly privatised and is now controlled by a private business group. Again MTNL, set up in 1986 to expand and upgrade the quantity and quality of telecom services in Delhi, the political capital, and Mumbai, the business capital, is now also part-privatised.

From 1994 onwards varying degrees of wireline and wireless competition have developed between the government-controlled telecom entities and newcomers such as Bharti Enterprises in the cities and in the 18 state and four metro zones (or circles) into which India is divided. However, with progress in telecommunications expansion not being as swift as some had hoped, the authorities were moved to draw up the New Telecommunications Policy of 1999 (NTP 1999). As well as hoping to speed up the achievement of some of the objectives of NTP 1994, the TRAI recognised that the convergence of both markets and technologies was a reality that was forcing realignment of the industry and invalidating some previous regulatory assumptions.

According to TRAI NTP 1999 documentation: 'At one level, telephone and broadcasting industries are entering each other's markets, while at another level, technology is blurring the difference between different conduit systems such as wireline and wireless. As in the case of most countries, separate licences have been issued in our country for basic, cellular, ISP, satellite and cable TV operators, each with separate industry structure, terms of entry and varying requirement to create infrastructure. However, this convergence now allows operators to use their facilities to deliver some services reserved for other operators, necessitating a re-look into the existing policy framework'.

The upshot of this re-look was the Unified Licensing Regime, a framework introduced in two stages starting in October 2003 and concluding in January 2005. Basically, a Unified License operator (one of four categories of license holder in India), can now deliver all telecom services - including voice, data, cable TV, Direct To Home TV, and radio broadcasting - through a single wire or wireless medium.

In the words of the TRAI 'the key objective of the Unified Licensing Regime is to encourage free growth of new applications and services leveraging on the technological developments in the Information and Communication Technology (ICT) area. Other main objectives of the Unified Licensing Regime are to simplify the procedure of licensing in the telecom sector, ensure flexibility and efficient utilisation of resources keeping in mind the technological developments, encourage efficient small operators to cover niche areas in particular rural, remote and telecommunication-facilities-wise less developed areas, and to ensure easy entry, level playing field and ‘no- worse off’ situation for existing operator's'.

As part of its second set of Unified Licensing recommendations in January, the TRAI also proposed that the revenue share license fee that stood at up to 15% of Adjusted Gross Revenue (AGR) be reduced to a maximum of 6% of AGR, with no revenue share and/or entry fee for some particular services.

Great expectations…for wireless?
The Shosteck Group calculates that India’s telecommunications license reform will lead it into the ranks of countries having the most advanced telecoms infrastructures. The consultancy also notes that the Unified Licensing Regime is enabling operators to use the most cost-efficient access technology available to them.

Unsurprising, given factors such as geography, population distribution, speed of roll-out, and network economics, this freedom is tending to reinforce India's move away from wired to wireless connectivity.
John Williamson