Managerial Economics: Analysis of the Indian Telecom Sector

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PROJECT REPORT ON
MANAGERIAL ECONOMICS

ANALYSIS OF TELECOM SECTOR IN INDIA

INTRODUCTION
India is the fourth largest telecom market in Asia after China, Japan and South Korea. The Indian telecom network is the eighth largest in the world and the second largest among emerging economies. At current levels, telecom intensiveness of Indian economy measured as the ratio of telecom revenues to GDP is 2.1 percent as compared with over 2.8 percent in developed economies. Indian telecom sector has undergone a major process of transformation through significant policy reforms. The reforms began in 1980s with telecom equipment manufacturing being opened for private sector and were later followed by National Telecom Policy (NTP) in 1994 and NTP'1999. The liberalization of the industry has created an impressive forward-momentum in India, resulting in a vigorously competitive and fast growing sector. Moreover, the government had relaxed significantly the foreign investment norms in the sector. According to the Department of Trade, India’s investment policy framework permits foreign direct investment (FDI) in a number of key sectors of the telecom markets. The benefit of this liberalization has been the drastic reduction in call charges. Where a 1 minute trunk call cost Rs. 30 earlier now it costs on Rs. 1. Due to the entry of BSNL and MTNL, cellular telephony costs have also come down rapidly. According to the latest data issued by the Cellular Operators Association of India (COAI), the industry association representing all GSM operators, the number of India's GSM subscribers had touched 136 million as of the end of June 2007-recording an addition of 5.4 million during June, or a growth of 4.12% when compared to 130.1 million at end-May 2007 The Unified Access licensing regime implemented in the year 2003, gave a major boost to this industry as it permitted basic and/or cellular mobile service using any technology. And today, India is one of the fastest growing markets for Global System for Mobile Communications (GSM) with its subscriber base increasing from 53mn in October 2005 to 116mn in June 2007. If India has to fulfill its full potential of becoming a key player in the New Economy and emerge as an IT superpower, it requires a strong and competitive telecom sector. Over the last ten years, significant developments have taken place in this sector and many more profound changes are expected to take place in this industry in the coming years. At present, India constitutes one of the world’s largest telecom markets. Although with a fixed telephone network of 29 million lines, India is ranked as one of the top ten-telecom networks in the world, its telephone density of 2.8 telephone lines per 100 persons compares unfavorably with global standards. The US has a teledensity of 50 telephone lines per 100 persons; Brazil has a tele-density of 10 telephone lines per 100 persons with the global average being 11 per 100. The current low tele-density offers telecom companies substantial growth opportunities in India and gives the country an option of adapting new technologies. The New Telecom Policy of 1999 (NTP 99) has set a target of increasing tele-density to 15 per cent by 2010.  Large investments in telecom sector are in process and additional investments are expected, following opening up of national and international long distance segments, permission of unlimited competition in basic telecom services and issue of fourth cellular licenses. Internationally, the per capita investments in telecom industry have increased in the countries with low teledensity. However, policy uncertainty could adversely affect investment plans of telecom operators. Further, long gestation and break-even period would affect the borrowing capability of telecom operators. Over the medium term, the telecom operators would have to infuse equity to meet the fund requirement for roll out of projects. Profitability of the incumbent PSUs is expected to decline...
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