Right policy decisions, a well-planned roadmap and an investor-friendly environment can ease the current challenges and put the Indian telecom industry on the world stage.
Telecommunication is emerging as a key driver of economic, industrial and social development in India with the industry registering exceptional growth in the last few years. India is currently the world´s second-largest telecommunications market with 964 million subscribers and a teledensity of around 78 per cent. With 164.81 million internet subscriptions, India also stood third-highest in terms of total internet users in 2013. The number of internet subscribers increased at a compounded annual growth rate (CAGR) of 52 per cent to 243 million in 2014 from 8.6 million in 2006. The wireless segment, with 97 per cent of total telephone subscriptions, dominates the market.
A host of socio-economic factors has contributed to this rapid stunning growth. India´s increased focus on services, rapid urbanisation, a bigger middle class with larger disposable incomes and a changing demographic profile with the youth increasingly open to adopting new technologies have fuelled this rapid growth over the last few years.
Several other factors have also played a significant role, say industry professionals. ¨Mobile internet, increasing affordability and rural penetration are some major factors behind this unprecedented growth,¨ says Sathish Gopalaiah, Partner, Telecom Sector, KPMG India. ¨The increase in mobile services has been correlated to the number of mobile devices, especially smart-phones. Increasing mobile usage, dual SIM ownership, low-cost devices and consistently declining average selling prices of handsets have been instrumental in the growth of mobile devices. The increasing usage of mobile value added services (MVAS) and the low cost, feature-rich devices have fuelled the popularity of over-the-top applications among the masses and enterprises alike. The exponential mobile subscriber growth is also responsible for the vigorous network expansion leading to the emergence of cell phone towers as a separate industry. Network expansion has also been crucial to the state of telecom equipment manufacturers,¨ elaborates Gopalaiah.
Idea Cellular´s spokesperson concurs. He says, ¨The Indian telecom industry´s revenue grew at a rate of 10.8 per cent in 2014-2015, year-on-year. Over the last four years, the industry has grown at a CAGR of 9.2 per cent. The key growth driver has been the increased adoption of internet on mobile and the proliferation of smart-phones and devices. India will soon surpass the USA to become the world´s second smart-phones user market with 200 plus million users, further fuelling data consumption on mobile devices.¨ Idea plans to launch 4G services on LTE platform in 2016, in a phased manner, initially focusing on four circles including Karnataka and Tamil Nadu, as well as markets which are seeing excellent demand for services over 3G.
No doubt, the Indian government´s initiatives have been the primary factors behind the industry´s progress. While the Telecom Policy of 1994 opened doors, the New Telecom Policy 1999 provided the impetus and set the trend for liberalisation. Since then, there have been several other polices, including the Broadband Policy 2004, Broadband Wireless Access Policy 2008, the 2G, 3G and 4 G policies. The telecommunication sector and telecom service providers (TSPs) were granted infrastructure status in 2013. Foreign direct investment (FDI) norms have also been relaxed from time to time attracting many international telecom majors to the sector. To promote green telecommunications, Telecom Regulatory Authority of India (TRAI) has issued recommendations on ´Approach towards Green Telecommunications´ to achieve the desired reduction in carbon emission with renewable energy technologies and energy efficient equipments.
¨The government has taken numerous policy decisions such as raising the FDI cap, promoting telecom equipment manufacturing through the Make in India initiative, formulating rules for mergers and acquisitions (M&As), etc. However, the scenario is likely to change with 100 per cent FDI allowance for basic and cellular mobile services and M&A norms approval,¨ reveals Gopalaiah.
With many more initiatives on the cards, like the National Optical Fibre Network (NOFN), the Digital India campaign, Make in India, fourth generation wireless (4G), cloud deployments, etc, the industry is no doubt poised for revolutionary changes. However, for it to become a reality, there is a need for effective implementation of the policy measures as also formulation of some new ones to counter various impediments to the sector´s healthy growth.
For instance, to make the Digital India Programme successful, detailed planning with long-term policy stability and sufficient availability of critical resources are necessary, states Rajan Mathews, Director General, Cellular Operators Association of India(COAI). Mathews says, ¨Key to the success of this programme will be the availability of a large quantum of contiguous spectrum. Also, a review is required to be done of NOFN to align the requirements with business and optimise its usage. We need a centralised and common procedure for RoW (Right of Way) permissions and charges, augmentation of existing back-haul and access networks as well as the removal of all demand-side constraints will be the key enablers that will make the programme a success.¨
Many telecom operators are now all set to roll out 4G wireless data services. However, there is some uncertainty about its success due to several infrastructural issues. In addition, the 3G uptake itself has been very slow with majority of smart-phone users still on 2G network. Many telecom companies paid huge monies to win spectrum to offer 3G services and even relaxed the tariffs to attract more users but to no avail. Affordability will play a vital role in the success of 4G. But that is not going to be easy for telecom operators, who are already bearing the brunt of ultra low-cost voice call plans and steep spectrum prices.
Limited availability of spectrum will be a major issue, points out Mathews. He says, ¨The digital dream of the new government can be realised only through the facilitation of sufficient quantity of globally harmonised spectrum in a contiguous manner, per operator. This is also the key requirement for effective deployment of all mobile broadband technologies. Today, contiguous spectrum is available only on a limited basis with the operators and much of the current allocation is non-contiguous due to allocation of spectrum at different times in small chunks.¨
The biggest challenge for the telecom industry is the hyper-competition in an environment of extreme spectrum scarcity confirms Idea´s spokesperson. He says, ¨With less quantum of spectrum available for the large numbers of operators, spectrum cost has been constantly rising. Additional regulatory costs have also been imposed on telecom operators resulting in the increased cost of services without much increase in tariffs, which is the lowest in the world.¨
He adds, ¨On an annualised basis, the wireless sector contributes nearly Rs 18,000 crore in license fees and spectrum usage charges. It contributes a further Rs 23,000 crore in the form of levies and taxes to the government exchequer, besides the indirect contribution in custom and excise duties. All this has resulted in the cumulative debt on the industry rising to more than Rs 350,000 crore. After the recently concluded spectrum auction, the RoI (Return on Investment) is less than 1 per cent.¨
Yet another issue that is affecting the industry is the inadequate and unstable power supply. Telecom tower companies use diesel generators to power their towers, despite the high diesel costs. In addition, due to concerns regarding radiation, the industry is having difficulty in setting up towers at the required sites, leading to reduced signal strength. Further, several existing sites are also getting shut for the same reason. As a result, many have shelved their network expansion plans.
While the teledensity in the country is around 78 per cent today, the rural teledensity is less than 20 per cent. Lack of telecom infrastructure in rural areas, as also the basic infrastructure like roads and power supply are a major hindrance. Service providers, therefore, have to incur a huge initial fixed cost, involving greater logistical risks and delays in rolling out their services.
The infrastructure providers are grappling with several other issues too, like low tenancies, high energy costs, RoW issues, varying rules for erecting towers across the country, dealing with multiple authorities for approvals, etc.
Evidently, telecom infrastructure, which plays a crucial role, particularly, in the wireless sector, has been severely over-stretched and needs massive expansion. But for reasons cited hitherto, there are few takers, more so since the shake-out from the 2G scandal in 2012. There has been a decline in equipment production too, after some service providers scaled back operations or exited the country following the top court´s annulment of permits held by them.
Funding remains a critical issue for the infrastructure industry as it is capital-intensive with a gestation period of 25-30 years. Investment in infrastructure, to a significant extent, depends on attracting private and foreign investment. At present, 74 per cent to 100 per cent FDI is permitted for various telecom services. However, the regulatory issues and declining operator margins have slowed down the investments. This will, however, change soon, say professionals.
¨As per an estimate, during the 12th Plan (2012-17), nearly 93 per cent of the Rs 943,899 crore projected investment required in the telecom sector will have to be shouldered by private telecom companies.
To promote investments in the telecom sector, the government liberalised FDI to 100 per cent in 2013.
The horizon for FDI now appears to be promising. Total FDI inflows increased from USD 304 million in 2012-13 to USD 1,307 million in 2013-14, which indicates investment is returning to the sector. During 2001-14, the telecom sector accounted for about seven percent of the total FDI inflows in the country,¨ reveals Mathews.
Despite the roadblocks and challenges, the future, no doubt, looks promising. Much, of course, will depend on creating a conducive environment for investors and industry players. Industry professionals are quite optimistic. ¨The Indian telecom industry is one of the largest and fastest growing sectors, with an estimated contribution of 2 per cent to India´s GDP, which is expected to rise to 3.5 per cent in the coming years,¨ says Idea´s spokesperson.
The government has taken several initiatives, like increasing the supply of key raw material for the sector as it released spectrum held by the defence services, for commercial use. The government also formulated policies on spectrum sharing and trading, all in an effort to boost growth.
The telecom sector is envisaged to grow and provide digital access to over a billion Indians in future. The industry has shown significant growth in the past few years owing to the faster adoption of data services by consumers. This will now get accelerated through the introduction of mobile based service platforms such as m-Banking, m-Education, m-Health and m-Governance,¨ says Idea´s spokesperson.
The opportunities will only increase for the players across the industry, believes Gopalaiah. He says, ¨The Indian telecom sector is undergoing a multi-fold transformation owing to its changing ecosystem, which includes network upgrades, 4G services deployment, OSS (Operations Support System) and BSS (Business Support System) changes, emergence of mobile applications, SMAC (social, mobile, analytics, and cloud), demand from small business and the internet.¨
He adds, ¨The mobile services industry is evolving under the impending data revolution. The renewed focus on BharatNet (formerly National Optic Fibre Network) has opened up the expansion opportunities for internet service providers too. Policies that boost a start-up culture along with the increasing usage of mobile applications have expedited the emergence of MVAS providers. The demand for low cost smart-phones, robust network expansion, and the Make in India initiative has opened up a window of opportunities for equipment manufacturers.¨
India is no doubt all set to take the lead globally, as projected in a Microsoft report that says the country will emerge as a leading player in the virtual world with 700 million internet users out of a total of 4.7 billion global users by 2025!
¨Allocation of spectrum at a fair price is the need of the hour¨
Rajan Mathews, Director General, Cellular Operators Association of India (COAI) shares his views on the current trends sweeping across the telecom industry.
What will be the future trends and focus areas in the telecom industry?
We expect 2015 to bring about consolidation, as well as restore vitality within the sector. Telecom companies´ focus is shifting from voice to data services, along with value-added services, customised solutions for consumers with content and applications in vernacular languages. Higher mobile data service adoption will be driven by the availability of compatible mobile devices, affordable data plans and rapidly rising internet users. To cater to the increased data service requirements, the trend toward the use of new technologies such as 3G and 4G is already visible. The emergence of robust mobile broadband will help accommodate the emerging breed of services such as converged services, M2M communications, cloud services, over-the-top services, etc. The increasing affordability and uptake of smart-phones and applications will be one of the major shapers of future investments. Increasing usage and demand for services from rural consumers will lead to network expansion and service upgrades.
What are the challenges in telecom infrastructure today? One of the major issues has been the lack of adequate spectrum. How should this be tackled?
There were no major merger and acquisitions last year due to restrictive M&A guidelines issued by Department of Telecom (DoT) in 2014. The mandate for the merged entity to make payment of the differential between the market determined price and the administrative price for the administratively allocated spectrum (4.4 MHz for GSM) held by the acquired entity along with spectrum caps, is limiting any consolidation in the sector. Further, the government has introduced a 10 per cent customs duty on specified telecom products (not covered under ITA-1) apparently to boost domestic manufacturing and reduce India´s dependence on imported telecom equipment. However, this will affect the procurement activities of the industry and will not serve any useful purpose other than further hurting the industry´s ability to invest in various expansion programmes. It will also invite retaliatory measures by countries exporting equipment to India.
The other factors challenging the industry´s performance are irrationally high levies and taxes applied on a financially stressed industry, lag in adoption of mobile Internet, difficulty in acquiring Right of Way (RoW) and the unreasonably high spectrum auction prices.
What policy interventions and reforms are required to be taken by the government to resolve these issues?
The government should ensure the allocation of adequate spectrum to the industry through a fair and transparent auction and issue guidelines on spectrum sharing and trading at the earliest. It should also review and modify the M&A guidelines to facilitate consolidation and promote orderly growth of the sector. Reforms required are rationalising and simplifying the tax structure, according benefits of infrastructure status already granted to the telecom sector like availability of assured grid power at industrial rates, tax holidays, preferential debt instruments, etc. There is a need to incentivise roll-out beyond committed levels through further reduction in license fee, permitting active infrastructure sharing and addressing RoW issues at the state and local levels, augmenting existing backhaul and access networks.
How do you foresee the future of the industry?
The Indian telecom industry is already witnessing a revival period with the new government in place. With ambitious GDP growth targets of 6-7 per cent, focus on tackling inflation, and facilitating a digital economy for the country, telecom operators have reason to be optimistic. The Digital India programme is expected to draw heavy investments into the sector, further boosting the infrastructure and capital worth of the industry.
¨Success of Digital India depends on the execution of the project¨
Sathish Gopalaiah, Partner, Telecom Sector, KPMG India shares his perspective on some major issues in the telecom industry.
What factors have so far discouraged international players from investing in India?
The presence of large number of TSPs and 74 per cent mega infrastructure project FDI cap until 2013 has been the major disincentives for the foreign TSPs to invest in India. The hyper-competition and the absence of full control over the operations has constantly dissuaded the large-scale global TSPs. The uncertainties surrounding the tax and policy structure, absence of enabling infrastructure, China´s edge over low cost manufacturing and our slow decision-making are just some factors that have kept the equipment manufacturers away from India.
What measures are required to attract more foreign investment into the industry?
Several government initiatives are required to make the Indian telecom sector an attractive investment destination among emerging economies. The ´Digital India´ mission is an initiative aimed to bolster the innovation-led investments in the country. The success of the initiative will be highly dependent on the execution of the project. Well-timed project deliverables, a common policy for the construction of telecom infrastructure and implementation of standard approach for similar project requirements will be critical to foreign investments. The ´Make in India´ initiative has already attracted the attention of global and domestic equipment manufacturers alike. Various equipment manufacturers have already outlined their investment plans focusing on India. Though still in its nascent stages, the ´Make in India´ initiative aims to provide the requisite policy and financial support to domestic equipment manufacturers, and to facilitate foreign investments in the country.
Physical infrastructure is another area that requires attention to facilitate investments. Inadequate spectrum, last mile infrastructure, backhaul, etc., are key areas requiring immediate government attention. Policy measures are needed to ensure faster ´Right of Way´ approvals with reference to telecom infrastructure. Additional measures such as tax rebates, lowering the tax percentage on communication services can further promote India as a preferred investment destination. India continues to lag behind its peers in business operations. Documentation at multiple levels, lack of transparency, various permits, and absence of single window clearance are some of the roadblocks in the ease of doing business.
What are the advantages of 4G network and what will be its impact?
The pan-India 4G network is poised to revolutionise the telecom sector. One of the foremost advantages is the seamless access to the internet. India has one of the largest markets for data services. The data flow on the telecom networks is multiplying every minute. The high-speed access is expected to be a huge step forward in terms of customer experience. Additionally, the performance indicators like call drop, network performance, data performance, internet speed, content quality and information access can be critical factors in defining overall customer experience.
To ensure faster adoption of the 4G services unlike 3G, the TSPs and device manufacturers are aggressively working towards churning out low cost 4G compatible Smartphones. This can greatly bring down the ownership cost of mobile internet for the end consumers and facilitate a faster movement to 4G services. The TSPs have traditionally remained confined to mere infrastructural or dumb pipe. The onset of OTT applications has forced TSPs to transform and focus on using high-level data analytics and next generation self-organising networks to effectively utilise their network and information they possess. TSPs are aggressively looking at ways to monetise the data and generate revenues.
(Disclaimer: The opinion represented above is of the individual and may not necessarily reflect the views of the firm.)
- Janaki Krishnamoorthi