For­eign Di­rect In­vest­ment in the In­dian Telecom­mu­ni­ca­tions Sec­tor

- Dr. R.P. Sa­haria

Economic Challenger - - NEWS - Dr. R.P. Sa­haria

Asstt. Pro­fes­sor of Economics, Govt. JMP Col­lege, Takhat­pur (Bi­laspur)

IN­TRO­DUC­TION

Tele­com ser­vices have been rec­og­nized the world-over as an im­por­tant tool for so­cioe­co­nomic de­vel­op­ment for a na­tion. It is one of the prime sup­port ser­vices needed for rapid growth and mod­ern­iza­tion of var­i­ous sec­tors of the econ­omy. In­dian telecom­mu­ni­ca­tion sec­tor has un­der­gone a ma­jor process of trans­for­ma­tion through sig­nif­i­cant pol­icy re­forms, par­tic­u­larly be­gin­ning with the an­nounce­ment of NTP 1994 which was sub­se­quently re-em­pha­sized and car­ried for­ward un­der NTP 1999 . Driven by var­i­ous pol­icy ini­tia­tives, the In­dian tele­com sec­tor wit­nessed a com­plete trans­for­ma­tion in the last decade. It has achieved a phe­nom­e­nal growth dur­ing the last few years and is poised to take a big leap in the fu­ture also.

Prior to 1991 In­dia ac­tively im­ple­mented an im­port sub­sti­tu­tion strat­egy. This strat­egy ef­fec­tively limited for­eign di­rect in­vest­ment in al­most all ma­jor ar­eas of the In­dian econ­omy. In 1991 In­dia ex­pe­ri­enced a bal­ance of pay­ments cri­sis, when for­eign ex­change re­serves ran dan­ger­ously low. Sub­se­quent to the cri­sis the In­dian govern­ment im­ple­mented a struc­tural ad­just­ment plan to sta­bi­lize the bal­ance of pay­ments and sus­tain long-term eco­nomic growth.

In­dia sought to re­duce the role of the govern­ment in the econ­omy and cre­ate greater mar­ket ef­fi­cien­cies. Some of the pri­mary im­pacts of the plan were to open up the econ­omy to for­eign in­vest­ment and en­cour­age pri­va­ti­za­tion in some for­merly state dom­i­nated in­dus­tries. In ad­di­tion, li­cens­ing re­quire­ments and im­port tar­iffs were re­duced. Tele-com­mu­ni­ca­tions in In­dia were for­merly pro­vided by state-owned en­ter­prises. The govern­ment com­pa­nies pro­vided all l ocal and l ong- dis­tance com­mu­ni­ca­tions within In­dia. Pri­vate in­vest­ment, for­eign and do­mes­tic was not per­mit­ted prior to the open­ing of the econ­omy in the 1990s.

OB­JEC­TIVES

a. To study the cur­rent sta­tus of for­eign di­rect in­vest­ment (FDI) in t he In­dian telecom­mu­ni­ca­tions sec­tor. b. To know the process of in­vest­ing and to study the per­for­mance of tele­com equip­ment man­u­fac­tur­ing sta­tus in In­dia. c. To ex­am­ine the fac­tors in­flu­enc­ing the level of

FDI in In­dian telecom­mu­ni­ca­tion sec­tor. d. To study the var­i­ous Tele­com poli­cies laid

down by govern­ment of In­dia.

RE­SEARCH METHOD­OL­OGY

The study is largely de­pen­dent on sec­ondary data which con­sists of an­nual re­ports, in­ter­nal man­u­als, in­ter­net web­sites, pub­li­ca­tions, text books etc.

De­ter­mi­nants of FDI : The al­lo­ca­tion of for­eign di­rect in­vest­ment is in­flu­enced by many fac­tors in­clud­ing the quan­tity and qual­ity of the host coun­try's la­bor pool, the wage rate of the host coun­try la­bor pool, the host or for­eign coun­try's reg­u­la­tory and le­gal en­vi­ron­ment, the size of the host coun­try’s mar­ket for the prod­uct, the phys­i­cal in­fra­struc­ture of the host coun­try, the po­lit­i­cal sta­bil­ity of the host coun­try and the tax regime.

The level of ed­u­ca­tion and lit­er­acy of the la­bor pool can in­flu­ence the amount of FDI re­ceived by the host coun­try. The lo­ca­tion may be

cho­sen to avoid tar­iffs or other pro­tec­tion­ist mea­sures em­ployed by the host coun­try to pro­tect do­mes­tic in­dus­tries.

The econ­omy of the host coun­try plays an im­por­tant role in de­ter­min­ing the al­lo­ca­tion of FDI. Sta­ble ex­change rates, limited in­fla­tion, the size of the rel­e­vant mar­ket and po­ten­tial for growth are key de­ter­mi­nants in at­tract­ing in­vest­ment. A for­eign com­pany may specif­i­cally choose to in­vest in or­der to meet do­mes­tic de­mand for their prod­ucts.

The po­lit­i­cal sta­bil­ity of in­sti­tu­tions in the host coun­try can be of high im­por­tance in the in­vest­ment de­ci­sion. The phys­i­cal in­fra­struc­ture in­cludes the ac­ces­si­bil­ity and level of telecom­mu­ni­ca­tions, trans­porta­tion net­works, elec­tric­ity, wa­ter, san­i­ta­tion and other re­lated pub­lic goods.

A sta­ble tax regime low­ers the risk of in­vest­ment to for­eign firm. The new en­trant may also be able to avoid tar­iffs by es­tab­lish­ing a lo­cal sub­sidiary. There has been a sub­stan­tial amount of lit­er­a­ture ex­am­in­ing the im­pact of tax­a­tion and ex­change rates on the amount of FDI in­flows to coun­tries.

Meth­ods of FDI : There are two pos­si­ble chan­nels for For­eign Di­rect In­vest­ment to en­ter into In­dia : Firstly, the au­to­matic route un­der which com­pa­nies re­ceiv­ing For­eign Di­rect In­vest­ment need to in­form the Re­serve Bank of In­dia within 30 days of re­ceipt of funds and is­suance of shares to the for­eign in­vestor and se­condly, for sec­tors that are not cov­ered un­der the au­to­matic route, prior ap­proval is needed from the For­eign In­vest­ment Pro­mo­tion Board (FIPB).

Sta­tus Sta­tus of of Tele­com Tele­com Sec­tor Sec­tor : : The In­dian Telecom­mu­ni­ca­tions net­work with 621 mil­lion con­nec­tions (as on March 2013) is the third largest in the world. The sec­tor is grow­ing at a speed of 45% dur­ing the re­cent years. The Govern­ment has taken fol­low­ing main ini­tia­tives for the growth of the Tele­com Sec­tor.

Lib­er­al­iza­tion Lib­er­al­iza­tion : : The process of lib­er­al­iza­tion in the coun­try be­gan in the right earnest with the an­nounce­ment of the New Eco­nomic Pol­icy in July 1991. Tele­com equip­ment man­u­fac­tur­ing was deli­censed in 1991 and value added ser­vices were de­clared open to the pri­vate sec­tor in 1992, fol­low­ing which ra­dio pag­ing, cel­lu­lar mo­bile and other value added ser­vices were opened grad­u­ally to the pri­vate sec­tor. A ma­jor break­through was the clear enun­ci­a­tion of the govern­ment's in­ten­tion of lib­er­al­iz­ing the tele­com sec­tor in the National Tele­com Pol­icy res­o­lu­tion of 13 th May 1994.

For­eign in­vestors in In­dian tele­com sec­tor :

Among the nine bid­ders, Voda­fone ac­counts for the high­est FDI at 70.9%, which in­cludes Voda­fone's in­vest­ments and some of Es­sar's own for­eign in­vest­ments. The sec­ond largest FDI is in Air­cel with its for­eign in­vestor – Global Com­mu­ni­ca­tion Ser­vices Hold­ing (GCSH) own­ing 64.9%. Dec­can Dig­i­tal, which owns 34.9% is, in turn, also held 25% by GCSH. So in that sense, the ex­act for­eign hold­ing in Air­cel is closer to 74% through di­rect and in­di­rect routes.

The other two bid­ders with lead­ing for­eign in­vest­ments are Eti­salat and S Tel. Eti­salat Mau­ri­tius holds 44.73% in Eti­salat In­dia with Del­phi In­vest­ments hold­ing 4.27%, to­talling 49%. Bahrain-based BMIC Ltd owns 42.7% of the 49% FDI in S Tel. Bharti Air­tel and Idea both have roughly 40% FDI. Pestel Ltd is Bharti's largest for­eign in­vestor with a 15.5% hold­ing, fol­lowed by for­eign FIs, for­eign com­pa­nies and share­hold­ers who own 17.9% FDI. Idea has FDI of 40.5% through TMI and P5Asia In­vest­ments.

Tatas have FDI of 34.1%, mostly through NTT Docomo, which is the sin­gle largest for­eign in­vestor at 26.5%. The only bid­der that has 100% In­dian in­vest­ment in 2G op­er­a­tions is Video­con. Re­liance com­mu­ni­ca­tions also has a very large chunk of its to­tal in­vest­ment held by In­dian pro­mot­ers.

Tar­gets Set By the Govern­ment

1. Net­work ex­pan­sion

• 800 mil­lion con­nec­tions by the year 2015.

2. Ru­ral tele­phony

• 200 mil­lion ru­ral sub­scribers by 2015.

• Re­duce ur­ban-ru­ral dig­i­tal di­vide from present 25:1 to 5:1 by 2013.

3. Broad­band

• 20 mil­lion Broad­band con­nec­tions by 2013.

• Broad­band with min­i­mum speed of 1 mbps.

• Broad­band cov­er­age for all School & Col­lege and pub­lic health care cen­tres by the end of year 2013.

• Broad­band on de­mand in ev­ery vil­lage by 2015.

4. Man­u­fac­tur­ing

• Mak­ing In­dia a hub for tele­com man­u­fac­tur­ing by fa­cil­i­tat­ing more and more tele­com spe­cific SEZs. Qua­dru­pling pro­duc­tion in 2013.

5. Re­search & De­vel­op­ment : Pre­em­i­nence of In­dia as a tech­nol­ogy so­lu­tion provider. Com­pre­hen­sive se­cu­rity in­fra­struc­ture for tele­com net­work. Tested in­fra­struc­ture for en­abling in­ter­op­er­abil­ity in Next Gen­er­a­tion Net­work.

6. In­ter­na­tional Band­width : Fa­cil­i­tat­ing avail­abil­ity of ad­e­quate in­ter­na­tional band­width at com­pet­i­tive prices to drive ITES sec­tor at faster growth.

CON­CLU­SION

For­eign di­rect in­vest­ment in the In­dian telecom­mu­ni­ca­tions sec­tor has in­creased sub­stan­tially since early 1991. Much of this growth can be at­trib­uted to for­eign firms en­ter­ing into part­ner­ship with lo­cal mo­bile tele­phone op­er­a­tors to serve cus­tomers across the coun­try. The present cost of telecom­mu­ni­ca­tions ac­cess may ex­ceed the af­ford­abil­ity of ru­ral res­i­dents. For­eign di­rect in­vest­ment in the In­dian telecom­mu­ni­ca­tions sec­tor is likely to in­crease fur­ther if lim­its on in­vest­ments are re­moved, reg­u­la­tions are clar­i­fied and the phys­i­cal in­fra­struc­tures are im­proved.

REF­ER­ENCES

1. Athr­eye, S. and Ka­pur (2001), S. “Pri­vate for­eign in­vest­ment in In­dia : pain or panacea ?” World Econ­omy, vol. 24, no. 3, 399-424.

2. Re­port of the Com­mit­tee on Com­pi­la­tion of For­eign Di­rect In­vest­ment in In­dia (2004). Re­ports on in­vest­ment ap­proval and FDI in In­dia. New Delhi : Acadeic Foun­da­tion.

3. Balasubramanyam, V. and Ma­ham­bare ( 2003), “FDI in In­dia” Transna­tional Cor­po­ra­tions, vol. 12, no. 2:45.

4. Peter Nun­nenkamp, Julius Spatz (2004), “FDI and eco­nomic growth in de­vel­op­ing economies ; how rel­e­vant are host-econ­omy and in­dus­try char­ac­ter­is­tics ?” Transna­tional Cor­po­ra­tions, vol. 13, Is­sue 3 ; 53.

5. For­eign Di­rect In­vest­ment in Emerg­ing Mar­ket Coun­tries (2003) – Re­port of the Work­ing Group of the Cap­i­tal Mar­kets Con­sul­ta­tive Group.

6. Pournarakis, Mike and Varsake­lis, Nikos (2005) “In­sti­tu­tions, in­ter­na­tion­al­iza­tion and FDI ; the For­eign Di­rect in­vest­ment in Emerg­ing Mar­ket Coun­tries – Re­port of the Work­ing Group of the Cap­i­tal Mar­kets Con­sul­ta­tive Group.

7. For­eign Di­rect In­vest­ment in Emerg­ing Mar­ket Coun­tries – Re­port of the Work­ing Group of the Cap­i­tal Mar­kets.

8. Econ­o­mist In­tel­li­gence Unit (2004) “The op­er­at­ing en­vi­ron­ment : Ma­jor state-owned en­ter­prises” Coun­try Com­merce, Main Re­port, Novem­ber 1.

9. In­dian Dept. of telecom­mu­ni­ca­tions http://www. In­vestin­di­at­ele­com.com

10. Econ­o­mist In­tel­li­gence Unit (2005), “Mo­bile tele­phones con­nect” Busi­ness In­dia In­tel­li­gence, Main Re­port, June 1.

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