India v. China

Can Indian Telecom Ever Catch Up With China?

India has caught up with China’s growth rate, but the number of fixed line and mobile users are less than one-third that of China (300 million versus 1.07 billion)

T he report released by the Telecom Regulatory Authority of India that India would overtake USA by mid-April 2008 to become the second-largest cellular market next to China has led to self-congratulatory chest-thumping by the Indian telecom sector. India added 8.53 million wireless (GSM + CDMA + WLL fixed) subscribers in February 2008, and 8.77 million in January 2008. The total number of wireless subscribers was 250.93 million at the end of February 2008, compared with 260.5 million in USA and 550.5 million in China.

Instead of patting ourselves on our back, the fact that China is so far ahead of India is a matter of shame. It is entirely due to the faulty policies pursued by the Indian government, right from Independence till the New Telecom Policy was formulated in 1999. From 1950 to 1990, India had 10 to 25 percent more telecom subscribers than China did, both in absolute numbers as well as as a percentage of the population. China started surging ahead in 1990, when it caught up with India's then teledensity of 0.65%, and pulled far ahead post-1996, in both fixed-line and mobile telephony. While India continued to treat telephones as a luxury, China realized that telecommunications was a key infrastructure sector, with several multiplier effects. Today, India has managed to almost catch up with the growth rate of China, but the absolute number of fixed line and mobile subscribers are less than one-third that of China (300 million versus 1.07 billion), due to the lost years of 1990-1999, when there was much public debate about telecom policies, but little actual action. Over the last year, India has added 91 million wireless subscribers, compared to 85 million by China. But China's growth is again accelerating – in contrast to the 8.53 million added by India in February 2008, China Mobile added 8 million new wireless subscribers and China Unicom added 1.5 million during the same month.

Today China has 41.2 cell phones per hundred population, compared to India's 25. The contrast is even greater in fixed-line telephones – China has 518million (39% teledensity), compared to India's 39.18 millionfixed-line subscribers.

There are several actions that the Department of Telecommuni cations, TRAI, and the private sector should immediately implement to increase cellular and broadband growth, especially in rural areas:
Since almost everyone in urban India who can afford a cellular phone already has one (in Delhi, Mumbai, and Bangalore, there are over 65 cellphones per 100 adults), subscriber additions will occur mainly in rural areas as well as among the lower income groups in urban areas. For this the prices of entry level handsets have to be brought down to the sub-Rs 800 range; at present the cheapest GSM phone is about Rs 1,400. The GSM Association internationally is working on a project to develop sub-US$ 20 handsets for developing countries. The first models are expected to enter the Indian market after nine months, and may have to be subsidized somewhat by operators.

The tariffs also have to be brought down to attract the low-end users. Whereas Indian tariffs are by far the lowest in the world in absolute terms (local calls average about Re 1 per minute and STD calls average Rs 2.40 per minute), they are still several times international norms in terms of Purchasing-Power-Parity. The Telecom Minister, Mr A. Raja, has stated that he intends to force operators to lower their tariffs to 10 paise per minute for local calls and 25 paise per minute for STD calls over the next two years.

A beginning has already been made by the abolition, from 1 April, of the Access Deficit Charge of 0.75 percent of Adjusted Gross Revenues payable by domestic operators, and the 50% reduction of ADC payable on incoming international calls.

But the existing operators are claiming that they really are not in a position to lower tariffs any further, without putting their expansion plans on hold. The head of Bharti, Sunil Bharti Mittal, has predicted that all new operators will run into losses and quickly become takeover targets if they try to undercut the tariffs of the present operators.

TRAI has just mooted a plan which would make it mandatory for operators to offer mobile connections at lower entry charges in rural areas as compared to urban areas. This has been opposed by all existing operators who fear that subscribers would book connections in rural areas and then use them in semi-urban or urban areas.

Another proposal of TRAI which could have increased teledensity in the rural areas has just been rejected by DoT. TRAI had proposed that the Universal Service Obligation Fund may be utilized by all operators to subsidize their rural rollouts. But DoT has decided to continue with the existing policy of providing USO subsidies to only one operator per region, selected through a bidding process.

The largest operator in rural areas, Bharat Sanchar Nigam Ltd, cannot easily expand its network rapidly due to the constraints imposed by its public-sector status. In 2005, BSNL had floated the world's largest telecom tender, for 61.5 million GSM lines. But some unsuccessful bidders went to court, and the tenders could not be allocated for almost a year. Meanwhile BSNL was losing over 3 million potential subscribers per month. BSNL has been demanding from the government that it should be allowed to purchase equipment rapidly, just like its private sector competitors, without going through the time-wasting procedure of tendering. In fact, the abolition of the Access Deficit Charge from 1 April wou lower BSNL's revenues by approximately Rs 5,000 crores. To partially compensate BSNL, TRAI has called on the government to pay an annual subsidy of Rs 2,000 crores for three years to BSNL for phones installed by it in rural areas before April 1, 2002.
The main constraint to the growth of the cellular industry is the severe shortage of electromagnetic spectrum. This has been exacerbated by the flawed policies of the government in allocating spectrum over the past eighty years, which is now complicated by litigation pending before TDSAT and the courts. Since 1920, the government allocated vast swathes of spectrum to defence forces, police and security agencies. These are utilizing only a small portion of their allocation, but are reluctant to vacate it in favour of private operators. The defence forces had agreed to vacate 45 MegaHertz (including 25 MHz for 3G services) in favour of cellular operators as long ago as 2005, but this process has been pushed back to mid-2009.

The news that the long awaited 3G policy has been cleared by the Telecom Commission and has been sent to the cabinet for approval is also a welcome development. Another measure which could bring down costs is to permit Mobile Virtual Network Operators. At present, the government does not permit MVNOs. In fact, GSM operators have opposed the Tata-Virgin deal, alleging that it is an MVNO in disguise. Luckily, the government has indicated that it is in favour of permitting MVNOs. Local manufacturing of telecom equipment should also be encouraged. Of the Rs 96.5 billion of wireless equipment installed in India in 2007, only Rs 5 billion was manufactured within India, amounting to 5.18 %. The rest was imported by the operators. In fact, a major part of China's success story in the 1990s was because of its insistence that multinationals manufacture
within China.

India's biggest disappointment has been in broadband access. As against the Indian government's own target of 10 million broadband subscribers by March 2007, there were only 3.47 million by February 2008. The solution for rural India is WIMAX (Worldwide Interoperability for Microwave Access). WIMAX IEEE 802.16 e and d technologies are ideally suited for India's rural areas. Luckily the Indian government as well as the private sector have recognized the suitability of WIMAX for India, and have formulated several initiatives. But again, spectrum is a problem. Internationally, most WIMAX equipment is designed for the 2.3 GigaHertz, 2.5 GHz, and 3.5 GHz bands. But in India, these bands were allotted years ago, mainly to defence agencies. In India, the government has so far allocated the 3.3-3.4 GHz band for WIMAX. This means that WIMAX equipment manufacturers will have to design especially for India, leading to much higher equipment costs than internationally.

Luckily, the government has asked the Department of Space, which was using 40 MHz in the 2.5 GHz band, to vacate it for future WIMAX users. BSNL and other telecom operators, which were also using around 40 MHz in the 2.5 GHz band for their back-end microwave links, have also been asked to vacate. The government has announced that it intends to auction 2 x 10 MHz each in the 2.5 GHz band to three WIMAX operators. However, no date has yet been set for this auction.