Indo-EU Free Trade Agreements:
Opportunities and Challenges for Indian Telecommunication Sector

Roopam Singh
Assistant Research Fellow, Centad

Introduction:

Communications have a key role to play in the development process. For developing countries like India, it is one of the critical inputs which would determine the pace of socio-economic transformation of society. Efficient and well developed communication system has become synonymous with modernity and economic growth. A well functioning telecommunication network is an essential component of economic infrastructure. The application of modern telecommunications technology can raise productivity and efficiency in all sectors, apart from contributing to improving the quality of life.

It is also one of the fastest growing sectors in India and has immense potential for growth till the market gets saturated. The telecommunication activity is commercial in nature and people are willing to pay for it. Of all infrastructure sectors, it is perhaps the best suited for private sector participation which would help to create a competitive environment and improve the quality of services to consumers. Deregulation and competition are key elements in telecommunications reforms all over the world and the same principles have lead to the growth of telecom sector in India too.

The telecom sector has grown rapidly only after the mid 90s. It was during the Eighth Five Year Plan that the private investments in telecom were allowed. But the monopoly of the Government was maintained during the Eighth Five Year plan. The Government recognises that the result of the privatisation has so far not been entirely satisfactory. The private sector entry has been slower than what was envisaged in the NTP 1994. It was only during the Ninth plan that the Government monopoly was break and Indian telecom sector was opened for the Free Trade Agreements with the foreign investors. In 1999, the government of India formulated a New Telecom Policy (NTP – 99). This was more comprehensive and reflected a new vision, direction and commitment.

India offers significant investment opportunities in the telecommunications sector. Amongst the various trading partners, European Union (EU) is India’s most important trading partner. Investment flows mainly went from the EU to India. EU is India’s largest source of FDI in telecom sector.

In this background, this study aims to make a preliminary assessment of the economic and social impacts of trade and investment liberalization measures in telecommunication sector. More specifically the study will include the following:

1. Description of the current situation and trends in the European Union and Indian telecom sector.

2. A screening of the important issues and horizontal issues based on their economic importance, expected impact and social effects.

3. The study will suggest flanking measures and policy recommendations to maximize the positive and mitigate the negative impacts identified.

The Telecom Sector in EU

The telecom services sector is a fast growing high-technology services sector, with high innovation and considerable investments, and productivity and profitability often significantly above the average for the non-financial business economy. In 2006, electronic communications services accounted for 1.8% of the EU economy. Europe is a world leader in the mobile communications sector, with many of the world’s largest equipment suppliers, mobile phone companies and mobile content producers.

Communication technologies ranging from the basic telephone service to the latest satellite systems and personal area networks are converging, allowing the delivery of increasingly powerful Information Society services. This convergence stimulates growth - in 2006, electronic communications services accounted for 35% of value added of the ICT sector, or 1.8% of the EU economy¹.

State of Basic Communication Indicator’s in EU – 27: (2002 - 07)

Source: http://www.itu.int/ITU-D/icteye/Reporting/Show

The telecommunication services show high teledensity level across the EU – 27 countries, when compared to the teledensity in a developing country like India (teledensity 18.31% in the year 2007). The teledensity through out the region show that the telecom sector is saturated in the region. But it’s the mobile cellular services that are keeping the circulation of the telecom services alive in the European markets.

The graph above shows decline in the fixed telephone lines and an increase in the number of mobile cellular subscribers. Despite the fact that revenues in the traditional fixed voices are falling at around 1.6 percent per annum, this remain an attractive market for the new entrants. Mobile penetration rates are very high throughout the region. The increasing trends in the mobile cellular subscriptions are due to value added services like Next Generation Networks (NGNs).

Europe's co-ordinated approach in the development and deployment of the GSM standard has propelled European companies into globally dominant positions in this enormously valuable market. Nowadays around two billion people in over 217 countries and territories use mobile phones based on Europe's GSM standard².

State of Telecommunication Services in India

Indian telecom sector has come a long way in achieving its dream of providing affordable and effective telecommunication facilities. As a result common man today has access to this most needed facility.

Telecom Network Status in India as on March 2007

Source: Department of Telecommunications, Government of India

The telecom sector has shown tremendous growth, it has also undergone a substantial change in terms of mobile versus fixed phones and public versus private participation. The teledensity is recorded to be 9.91% by March 2007. However, during 2002–07, the total telephone connections increased by 161.86 million as on 31 March 2007, thereby achieving a teledensity of 18.31% by March 2007. With the opening of the telecom sector to the private operators, their share in the number of subscribers has significantly increased, which is evident from the Table 12.1.4.

The number of telephones has increased from 44.97 million as on 31 March 2002 to 206.83 million as on 31 March 2007, exhibiting a CAGR of around 35.68%. The number of mobile phone/wireless subscribers increased from 6.68 million as on 31 March 2002 to 166.05 million as on 31 March 2007, exhibiting a CAGR of 90.15%. The number of Internet subscribers grew at 23%, while the broadband subscribers grew from a meager 0.18 million during the year 2004–05 to 2.28 million during the year 2006–07.

Growth in Telecom Network over the year 2002 – 2007 (in million)

Source: Author’s estimates as per data provided by Department of Telecommunications, GoI

The chart above shows exponential growth in the private sector participation in the telecom sector, it shows an increase of 128.7 million phones over the year 2002 to year 2007. Another remarkable feature is increased use of wireless phones. This is confirmed from the rising share of wireless phones, which increased from 14.85% (6.68 million telephones) in March 2002 to 80.28% (166.05 million telephones) in March 2007. Though the urban phones show an increase of 512 percent but trends in rural phones is not that encouraging.

Trends in Tele-density

(In percent)

Teledensity in the country has steadily increased from 4.29% as on March 2002 to 18.31% as on March 2007. The graph shows a wide gap between urban teledensity (55.94%) and rural teledensity (2.83%). The rural telephony has not kept pace with the impressive growth in the urban connectivity. Infact, the increase in the total teledensity is due to increase in the urban teledensity; rural teledensity is not a factor behind this increase.

Besides increase in the basic telecom indicator, the sector, however, is at a turning point, with “second-generation” GSM-based services being replaced by third-generation (3G) networks. By providing high-speed, mobile internet access, these technologies open up a landscape where users can communicate, read, listen, watch and work as they wish, wherever they wish, using mobile services personalised to their interests and even physical location.

The trends in telecom sector in India and European Union through light on the fact that there lies a similar situation in the telecom sectors in Europe and India interms of decline in the fixed voice connections and thus the revenue generated from it is lowered in both EU countries and India. There is a shift to revenue-rich sectors such as mobile data and to content delivered over upgraded IP networks. These services include – Video – on – Demand (VoD) and Internet Protocol Television (IPTV). These services are nascent in both the markets but have potential to capture the market. The regulatory bottlenecks for IPTV have already been lifted by Telecom Regulatory Authority of India (TRAI).

Other recent key development in the Indian telecom sector is the steps towards becoming the first country in the world to allow spectrum sharing, though there are pros and cons of allowing spectrum sharing. Sify has selected the Cisco CRS-1 Carrier Routing System as the foundation of Sify's Internet Protocol Next-Generation Network (IP NGN). The decision is part of Sify's strategy to enhance its existing core network to meet customers' ever increasing demand for sophisticated network services and to address the rapidly evolving India market.³ European Union is also looking to Next Generation Networks (NGN). Besides all these new initiatives, mobile telephony and broadband remain the drivers fuelling the expansion of telecommunication sector world wide.

Major Constraints:

The major constraints that are identified in the telecom sector in India are listed below –

• The manufacturing capacity of the indigenous industry is small in relation to the other major operators in the world and export constitutes a small proportion of the total production.

• The non-availability of the latest technology, poor R&D base, non-adoption of exports as a strategy of growth and limited access to international financial markets for cheap finance are among the major constraints.

• Although a teledensity of 18.31% has been achieved, there exists a wide gap between urban teledensity (55.94%) and rural teledensity (2.83%). Considering the fact that 70% of the population lives in rural areas in India, the real challenge will be to connect rural India.

FDI Flows in Telecom Sector:

Foreign Direct Investment plays a pivotal role in the development of telecommunication sector. Foreign Direct Investment in India is allowed through four basic routes namely, financial collaborations, technical collaborations and joint ventures, capital markets via Euro issues, and private placements or preferential allotments.

Indian telecom sector ranks first in terms of actual Foreign Direct Investment (FDI) inflow. The Foreign Direct Investment Inflows during the year 2007-08 was USD 5,614 million. Services, telecom, electrical equipment, real estate and transportation were the five major sectors that received maximum foreign direct investment inflows in India in the year 2007. Foreign Direct Investment (FDI) inflows into India reached USD 4.9 billion in the first quarter of the year 2007. The major contributor in this alarming FDI Inflow had been the British Telecom major called Vodafone. It led to FDI Inflow of USD 801 million in India's growing telecom industry.

FDI inflows into India:

Source: Prospects for the Telecommunication Sector under the Indo - EU Trade and Investment Agreement, 2008⁴

The table above reveals that FDI inflows have received an impetus only after the liberalisation of the telecom sector in the year 1994 and show a sudden exponential inflow in the year 1996. The FDI increased by 360 percent within a year (1995 to 1996). The year 1999 and 2000 show a decline in the FDI flow, probably due to the prevailing regulatory and institutional framework. Than finally it took the upsurge in the year 2006, where it witnesses an increase of 74 percent across all the services. As per many of the researchers the reason for these erratic trends in the telecom and other services lie in the regulatory framework of our country but actually it has a lot to do with the international politics and the policies and regulatory regime of the countries with which India is undergoing Foreign Trade Agreements.

Opportunities in Indian Market:

India offers significant investment opportunities in the telecommunications sector. India has huge population but the number of telephone lines and cellular phones per 100 people is low when compared with the countries in European Union and other Asian countries. In India mobile teledensity in urban areas is 50 percent whereas, in rural areas it is accounted to 5.5 percent. This offers tremendous scope for further expansion. Indian telecom sector shows a higher comparative growth in the last two years, when compared to the previous years, is still a fraction of the growth in the telecom sector in EU. The Indian telecom sector revenue was less than 5 percent of the entire EU telecom revenue in the year 2005. A similarity between the telecom sector in Europe and India is the inexorable decline in the fixed voice revenue and the shift to revenue rich commodities such as mobile data and to content derived over under graded IP networks. India serves as the potential investment ground for EU telecom companies as the telecom market is yet to be explored.

Case Study - Major Feedback:

Opportunities in Europe:

As shown on the page 2, Table1 the EU telecom market is saturated in terms of teledensity. Through there is wide scope for the mobile communication and broadband services but Indian telecom concerns does not specialize in these, especially in the infrastructure. Most of the EU countries have most advanced telecommunication networks in the world. India can only seek for limited opportunities in the lesser developed European countries.

Conclusion:

In the Indo-EU FTA framework EU is the net gainer with regard to telecommunication sector whereas, India has limited opportunities in the EU market. The limited opportunity for India is FDI inflows induced. A cautious approach is required with regard to 3G spectrum liberalization.

Recommendations:

To remove the bottlenecks by initiating necessary policy changes. This may include encouraging joint ventures, rationalisation of custom and import duties on inputs and development of a strong industry-sponsored R&D base.

RF spectrum being a limited resource, with competing and increasing demands, there is a need to have optimal and efficient use with greater sharing of this resource by all stakeholders. Therefore, effective RF spectrum planning has to be carried out for short term, medium term, and long term, taking into account the emerging new technologies.

As voice-based connectivity (telephony) alone may not be the best economically viable option. Therefore, the connectivity should predominantly be data based having killer applications to make it sustainable on which voice services can also be provided.

To accelerate broadband connectivity, equipments need to be made available at an affordable price. In addition, local content in local languages need to be developed.

The transformation of traditional public telecommunications networks into Internet Protocol (IP) based NGN will require significant technical, human, as well as financial resources. Further activities relating to migration to Internet Protocol version-6 will have to be given priority, in order to spread Internet much faster.

Communication network needs to be adequately protected for which necessary network security related initiatives need to be put in place.

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References:

Reports:

Annual Annual Report on Telecommunication, 2007 - 08. Ministry of Communications and Information Technology, Department of Telecommunications, Government of India

Kathuria, Rajat, 2008. Prospects for the Telecommunication Sector under the Indo - EU Trade and Investment Agreement, Indian Council for Research on International Economic Relations, Nov 2007

Websites:

http://www.itu.int/ITU-D/icteye/Reporting/ShowReport.aspx

Basic Indicators on Telecom

http://planningcommission.nic.in/plans/planrel/fiveyr/11th/11_v2/11th_vol2.pdf

Eleventh Five Year Plan, Planning Commission, Government of India

http://www.itu.int/net/home/index.aspx

International Telecommunication Union (ITU), Annual Report, 2007

http://www.itu.int/ITU-D/ict/index.html

International Telecommunication Union (ITU), Statistics, 2007

http://www.financialexpress.com/news/India-Logs-Top-Nos-In-Telec...