Foreign Direct Investment in the Indian Telecommunications Sector
- Dr. R.P. Saharia
Asstt. Professor of Economics, Govt. JMP College, Takhatpur (Bilaspur)
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.
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.
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.
• 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.
• 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.
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.
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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.
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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.