Should mobile prices in India be forborne?

India, like many other countries of the world, have adopted a gradual approach to telecom sector reform through selective privatization and managed competition in different segments of the telecom market. The mid 1990s saw the emergence of private GSM mobile operators on the telecom scene of India. Earlier the cellular market was dominated by only two players who had comfortably carved out the market between themselves. The telecom regulator in India (TRAI) regulated prices to ensure that the entire consumer surplus was not cornered by the private telecom operators.
The average airtime tariff in year 2002 was at Rs.1.8 per minute against the peak ceiling tariff of Rs.16.80 per minute when the NTP (National Telecom Policy) 1999 was announced. Nation-wide, average mobile tariff is Rs 1.5-2 per minute for airtime and Rs 295 as rental. The TRAI ceiling is much higher at Rs 4.65/minute for airtime and Rs 422 for rental. Thus the entry of BSNL and Reliance in Indian mobile market in year 2002 increased competition and coupled with the declining prices - in terms of duties, tariff and mobile phone sets - made the Indian cellular industry a low margins and high volume game. Till the entry of these players in 2002 though the ARPU-Average Revenue Per Unit (Subscriber) for mobile services was very high (as compared to what it is today i. e. approximately Rs 400) because of cartel formation in deciding the prices of mobile services, yet the operators were making losses as the volumes of operations were low. The position in the 2002 changed considerably when all the operators started fixing their tariffs as per actual market prices. The tariffs for all the operators were much less than the ceiling fixed by TRAI.

The overall result of tremendous competition was that the pricing of mobile service became truly market dependent. Realizing the same, TRAI decided to deregulate the pricing of mobile services in India. Since 2003, the mobile tariffs are forborne in India.

Presently the tariffs for mobile telephony in India have all the more turned one of the lowest in the world. Some reports suggest that tariffs in India are about 50% lower than that of its neighbors, Pakistan and Sri Lanka. This is the reason for high mobile growth in that country. The number of telephones in India, the world’s fifth-largest telecom market, has crossed 100 million connections and the customer base is likely to touch 250 million by 2007. The rates seem to be further going south wards. It would be interesting to note that the current rates in India in March 2006 are as low as 0.01$ per minute. In March 2006 - a one-minute call anywhere in country is costing just Re 1 compared with Rs 2.49 earlier.

The role of regulator in determining the pricing of mobile service in India has been appreciable. This has served the twin purpose of customer satisfaction and development of the industry. Over the period of time while the customers have been benefited by the decreasing prices, the operators could also make profits based on the volumes. The airtime rates have fallen from about Rs. 17 per minute in mid nineties to as low as 40 paise per minute in 2006. The Telecom industry ARPUs have consistently fallen from a healthy Rs.1300 per month in 1999 to Rs 386 in 2006, primarily as a result of decreasing rentals as well as airtime rate, which has increased affordability and aided the 100% + growth in subscriber base and consequent increase in tele-density of India. Operational costs also mirrored the downward trend, dropping from a level of about Rs 1000 in 1999 to the current Rs 210 per subscriber per month. Reaping benefits of economies of scale due to the burgeoning subscriber base and cost efficiency measures adopted by the operators, the Industry EBITDA margin at the current 33% has shown a constant northward trend except for the year 2003 when most 4th operators started operations.

India has set ambitious targets for telecom growth. To achieve these high targets the profitability and sustainability of telecom players has to be ensured. In last 3-4 years Indian telecom market has witnessed mergers and acquisition of small players by big operators as these small players could not cope up the competition. The Indian telecom market today has been virtually divided between 4-5 big operators. Now there is serious concern for too competitive rates. If the competition continues in the way it has been going on for last 3-4 years, the feasibility of the operations of some of the players may become questionable. When the author has questioned one of the members of TRAI on the issue, he opined that the sustainable revenues per month per subscriber have been as low as $5 in some parts of the world. But the same can be questioned in the Indian scenario for following reasons –
A) The telecom market in India is divided amongst very few large players and the role of most of other players is negligible.Further within a year or too the peripheral players will be taken over by the big players. The subscriber wise break-up of Indian mobile market is shown below –



The break-up reveals that the 85% of the mobile market in India is cornered by five major players. March 2006 itself saw that their were three major sell outs of holdings (Two by TATAs and one by HUTCH) in Indian mobile market. Thus the possibility of one or two players taking over and dominating the Indian mobile market will become high if the prices and hence the profit margins of companies keep going south.

B) In last two months i.e. January and February 2006 almost 10 million new mobile connections were added in India. The main reason for this growth was the release of life time free connections by the operators. Though most of the new connections were given in this life time free schemes, in absence of concrete figures let us assume that half of the new connections that were given in these two months were life time free connection. This means that every second connection given by operator may not yield any monthly revenue ( in fact operators are riding on premises that many of them will convert into regular connections over a period of time, which may or may not happen). The average monthly revenue per subscriber in Indian mobile market is around Rs 380/-. If 50% of the new connection do not yield any monthly revenue then this means that the average revenue per month from each new connection will be around Rs 190/-. This is below the lowest sustainable revenue per month per subscriber in any part of the world. Further, since the One India tariff has been launched by the operators, the revenue per month per unit (RPU) figures for coming months may come down.

This indicates that the possibility of decrease in profitability of operators is very high and will lead to selling off of the business by least viable operators to the more viable ones. The discussion opens a new direction for regulator to act in. While in the initial years TRAI has been fixing ceiling tariffs, it is now felt that TRAI should once again regulate the pricing of cellular services in India, but this time it should fix floor prices in tariff. If this is not ensured the viability of few operators may suffer and this will give a setback to the future plans of Indian government for increasing the tele-density in country. Any operator going out of the Indian mobile market scene in coming years will result in market failure. This will not only increase the prices of mobile services but will also give a setback to customers faith in other operators.


The GSM cellular Industry is nearly in top gear and is set at the right pace to achieve the envisaged targets. The regulator has been instrumental in bringing the right policy at the appropriate time to fuel this growth. It once again has a major role to ensure that the momentum of growth is not disturbed by over competition and should step-in to suggest floor prices for the tariff for mobile services in India, in absence of which the growing telecom bubble in India may burst.

India Divided - 'Digitally'

Telecom Revolution in India – The Myth

“Telecommunications, as a means of sharing information, is not simply a connection between people, but a link in the chain of the development process itself.”

Telecommunication, along with electricity and transport, has been identified as key infrastructure sector for building tomorrows India. The sector, better known globally as Information and Communication Technologies (ICT), is one of the prime support services needed for rapid growth and modernization of various sectors of the economy and is also vital for social development of the country. Surveys have shown that every single effect in the telecom sector has a six fold effect in the economy of India. The same has been iterated in the Telecom policies of 1994 and 1999. These policies focused on :

­ – Telecommunication for all and telecommunication within reach of all.
­ – Universal services covering all villages at affordable and reasonable price.
– Development of telecommunication facilities in remote, hilly and tribal areas of country.

In all, a conducive and enabling environment was envisaged by these policies to facilitate India’s vision of becoming an IT super power. In 2004, if we look back, we will find that many of the targets set by these policies have been achieved in totality but, a deep insight into the facts and figures will reflect a glaring disparity between rollout of ICT services in urban and rural India. The writing on the wall is clear. The implementation of new telecom policy has left India divided – digitally.

Parameter Urban Rural All India
Population (2001 Census) in Million 286.1(27.8%) 742.6 (72.2%) 1028.7
No. of house holds. in Million 71.6 (28.7%) 177.5 (71.3%) 249.1
Teledensity ~35% 1.84% 12.1%

The above figures clearly show that telecommunication revolution in India is only skin deep. In fact the telecommunication growth in rural areas is not only poor but is infact on a declining trend.

Reasons for skin deep telecom penetration in Rural India

The rural areas are characterized by sparse population having poor purchasing power. The basic infrastructure viz. electricity and transport is inadequate. In such areas the public interest in telecom facility is caught in a typical cart and horse situation where in absence of telecommunication facility the public interest has not been stimulated. It is not surprising that out of 6,07,491 village is India only 5,22,347 have direct access to telephone facility. With the advent of liberalisation in telecom sector all private and government based telecom companies have been concentrating on providing services in big cities and towns to maximize profits. Presently the provision of telecom services in rural areas is typified by high set up cost and low returns. These typical socio-economic conditions, coupled with poor geographical spread has resulted in declining growth of telecommunications infrastructure in rural India. Though investment in telecommunication infrastructure has jumped from 3.6 percent of GDP in seventh plan to 13% of GDP in Ninth Plan, half of the total telephones in India are concentrated in Metropolitan and 100 other capital/commercial cities.

Bridging the divide – Suggested measures

Information & communication technology sector is in a very dynamic stage today. In such a scenario, reform in policies is a continuous process necessitated by dynamics of change & technology innovations. To fill up the huge digital divide present in India immediate policy changes are required so as to make the sector truly liberal. Until and unless 72% of population living in rural India is provided greater access to telephone, it will be difficult to have appreciable impact on projected social and economic growth.
Out of present equipped capacity of 15.44 million lines in India, only 11.73 million connections have been provided. This means that with little efforts and almost negligible expenditure 37.1 lakh connections can be provided. The first step should be on designing a suitable tariff for rural India so as to target these 37.1 lakh connection at the outset. The tariff can be subsidized for basic use (say for first 200 calls per month) through levies collected by means of Access deficit charges or Universal Service Obligation (USO) fund.
The next step is the use of right technology for expansion of services in rural areas. High set-up cost and lower rate of return are the main reasons why private operators are hesitant in rolling out their services in these areas. But choice of appropriate technology can help reduction of initial capital cost as well as subsequent operation and maintenance cost. It is estimated that to achieve a tele-density of 3 by 2007 in rural India, investment required to be pumped will be to the tune of Rs. 20,000 crores. If cost effective technologies are not inducted, one can imagine the investment required if this tele-density is to touch the current teledensity in urban areas i.e. 20. Research has shown that deployment of CDMA based WLL systems and Cordect based system will be most cost effective in rural areas, whereas use of traditional wireline or satellite based systems will not be a profitable approach.
Under New Telecom Policy, the private sector participation had a commitment to provide 98000 village public telephones (VPTs) by 2001 itself, against which only 12665 VPTs have been provided by them till March 2004. The reason for this circumvention was that they preferred to pay fines than fulfilling their obligations. To counter such situation, either the penalty imposed should be so significant or the statuary levy on gross revenue (called USO fund) may be increased from 5 to 10 percent.
While it is easy for operators to rollout wireless network in rural areas, it will be difficult for people there to opt for these services due to heavy initial cost involved in handsets (say to the tune of Rs. 3000 to Rs 4000). Tax holidays and exemptions to telecom equipment manufacturers can bring down the cost of equipment for committed rural use. The instruments of Gram Sanchar Sevak Youjna (Joint scheme of BSNL & Depart. of Post where postman carries mobile PCO with him to village) can be fully subsidized and provided to every postman who is operating in rural area. This way at least indirect access to telecom services can be ensured in all inhabited villages of India. Till date, only Panjab, Kerala, Haryana & Tamilnadu have the distinction of providing telecom coverage to 100% villages.
Efforts of Non Government Organizations in this sector have never been in vanguard. Projects like Gramphone taken up in Ardhra Pradesh & Rural Kiosk set up taken up by n-logue communications in 1000 villages of Maharashtra, Tamilnadu and Gujarat should be encouraged and funded by the Government. NGOs who are committed to connect rural phones and other rural service providers should not only be excepted from license fee and other guarantees but should also be provided subsidised infrastructure in form of land and electricity. For such operations the electricity generation cess, service tax etc. can be waived off for a certain period to boost the all-important ICT infrastructure required to even out the skewed economic growth in India. Both central and state government should come out with joint plans and incentives for rural telecom operators and users to make sure that 72% of the people living in world’s largest democracy are not left behind.
Last but most important aspect is of Human Resources development coupled with encouraged R & D on technologies suited for rural sector. Had it not been for the C-DOT, the 90% of present exchanges in rural India would not have been there. HRD for supporting sales, service, and maintenance along with awareness development can further expand rural telecom sector. Area specific policies like the Tribal sub plan of 1989 will help in improvement of awareness level of utilization of communications systems for various sectors like Health (telemedicine), education (distance learning) and agrarian business (market & price information). Projects like Gyandoot (Madhya Pradesh Government's Project) can not only help in adaptations of communication technologies by villages but can also increase transparency, accountability and efficiency in government operations through information dissipation in rural areas.

The silver lining - Bridged road ahead

The most stimulating change in telecom is that apart from PSUs, the private operators are waking up to their rural responsibilities. The saturated urban market is also forcing the players to move towards the untapped rural hinterland. Research shows that socio-economic interests of villages are confined to near by villages or big towns. As the telephone services are made available in all villages the telecom traffic will increase automatically. As the penetrating level goes on increasing, more and more player will automatically step into the rural telecom sector to make it self-sustainable. This can probably be achieved by 2010, when, it is envisaged that a rural teledensity of 4 will be achieved. Till then, the sector has to be supported by the Government through funding, incentives, institutions, infrastructure support and favorable policies to integrate all these. It is the formation and successful implementation of the policy matters that will ultimately matter.
A delicate blend of appropriate technological choice in combination with management and financing mechanism supported by Government policies can help penetration of communication services in Rural India. It should be clearly understood that once the rural telecommunication amplifies, overall social and economic development of country will automatically permeate. Then and only then, India can consolidate its positions as a leading hub of communication systems and IT enabled services and can establish itself as a leader in new disciplines such as bioinformatics and biotechnology. Only then, the current change in Information and Communication Technology can become a saga of vanishing myths. Only then, ongoing IT process in India can transform into a “True Revolution”.

What SENSEX should be representing ???

Lately, the Indian stock market has been booming. Whan ever the market booms it reminds us of 1993-94 and 2002 period. We become concious whether what the SENSEX is representing is a true picture of stock market or not. Afterall SENSEX represents movement of stock prices of only thirty companies.

This raise a crucial issue. Why only 30 companies should be included in SENSEX? Those who favor the current practice will opine that if the quality of rice that has been cooked can be judged from the sample, why one should analyze each grain and than there are costs associated with it. That argument might have been true when the technology aids were not available. If some microwave can tell you how much each rice grain is actually cooked and that too instantaneously, why shouldn’t one rely on age old method of taking sample. One might discover that while the rice sample is OK the rice at the bottom is actually over-cooked. To cut the story short one needs to go to the bottom to get the exact picture.

Strangely, BSE comes out with so many indices and data every day. In fact there are no incremental costs to get this data once every thing is computerized. There is in fact a BSE 500 index which actually covers 40.26 % of market capitalization and 77.83% of turnover ( as compared to BSE -30 which covers only half of this). Then why BSE – 500 is not used as SENSEX? It will actually give better picture. The two indices may move in the same direction but they may represent a different picture. If one calculates the difference (% wise) between the movement of the two indices for year 2005, (taking the % change of each one of them on the closing day of month) and see by what % the change differs. Sometimes the change differs by more than 100%.

Then why only BSE 30 is taken as SENSEX ??? As an investor I personally feel that market capitalization of mutual funds is increasing considerably and few fund companies can effect the index considerably by investing in 30 shares, which for 500 shares would be very difficult. This also tends to favor few companies whose shares are included in the 30 company list. (list is given at the end ). Ironically most of the players in stock market( financial institution ) happen to be on the list.

My very concerns are as investors. And let me tell you that the perceptions of common investors in India about the financial market are not very good. Every time the market starts picking up - on the scene arrives the Mehtas, Parekhs to prick the balloon. The market investors (I am talking of common household saving that goes into the financial market) looks at SENSEX movement as pulse of the market. To that extent why the SENSEX should be mere indicative? If at all this is the case, then why this indication is different from the BSE -500 index. I will tell you why?

Based on the SENSEX, the common investors’ sentiments are taken on ride and they start investing. Never in history of Indian stock market one mutual fund could collect 5700 crores (Reliance equity fund has done that recently) and that too from 1 million investors. Why people are investing? The SENSEX gives them an indication that they will get huge returns out of that( this is also fueled by media which despite all talent it has , understands that the SENSEX is what Indian stock market is). SBI blue chip collected about 2900 crores. Where all this money will be invested? In 30 companies (to a large extend) thus giving further boost to SENSEX as it represents only 30 companies. The investors see returns as the SENSEX moves up. In the mean time SBI will come out with RED CHIP and will collect 5000 cr as more investors will see value in rising SENSEX. The balloon is all set to be pricked again.
What snowballic effect the market will have remains to be seen.

As investor I fail to understand why SEBI could not control the simple fraud that is carried out IPO after IPO. When the IPO is about to come in market the share prices of the company will inflate (pseudo) and will fall flat the moment IPO is listed for trading.
Consider one more scenario – ICICI is investment bankers and they underwrite an IPO. As broker they are also advising the investors whether one should subscribe to this IPO or not. (You can see the advice link just on the web page where they sell IPO) Now if they are underwriting an issue do you expect them to say do not invest in this issue. They will advice invest for short term listing gains as well aslong term gains. So as underwriter, as banker and as broker ICICI will gain (and also the company which issues IPO) at whose cost – investors. These are not examples of Harshad Mehta period. This is happening now also.
Now these are very simple issues which a common investor like myself can understand – why SEBI can’t. They will wait for the scam to happen and then react.

Now-a-days SENSEX has become symbolic of markets acceptance of budget. The day budget is announced if the market is not upbeat about it (SENSEX not rising) then it is seen as failure of budget. Now what would you do if you want to show that the market has responded to budget. . Ask state owned financial companies to make sure that money is invested in 30 companies for next few days. If the SENSEX would have been representing the full market transaction, it would be extremely difficult.





SENSEX Constituents: 27-Feb-06

Code Name Sector Adj. Factor
500410 Associated Cement Companys Ltd. Housing Related 0.70
500490 Bajaj Auto Ltd. Transport Equipments 0.70
500103 Bharat Heavy Electricals Ltd. Capital Goods 0.35
532454 Bharti Tele Ventures Ltd. Telecom 0.35
500087 Cipla Ltd. Healthcare 0.60
500124 Dr Reddy's Laboratories Ltd. Healthcare 0.75
500300 Grasim Industries Ltd. Diversified 0.80
500425 Gujarat Ambuja Cements Ltd. Housing Related 0.80
500010 HDFC Finance 0.90
500180 HDFC Bank Ltd. Finance 0.80
500182 Hero Honda Motors Ltd. Transport Equipments 0.50
500440 Hindalco Industries Ltd. Metal,Metal Products & Mining 0.75
500696 Hindustan Lever Ltd. FMCG 0.50
532174 ICICI Bank Ltd. Finance 1.00
500209 Infosys Technologies Ltd. Information Technology 0.80
500875 ITC Ltd. FMCG 0.70
500510 Larsen & Toubro Limited Capital Goods 0.90
532500 Maruti Udyog Ltd. Transport Equipments 0.30
532555 National Thermal Power Corpn. Ltd. Power 0.15
500312 ONGC Ltd. Oil & Gas 0.15
500359 Ranbaxy Laboratories Ltd. Healthcare 0.65
500390 Reliance Energy Ltd. Power 0.50
500325 Reliance Industries Ltd. Oil & Gas 0.55
500376 Satyam Computer Services Ltd. Information Technology 0.90
500112 State Bank of India Finance 0.45
532540 Tata Consultancy Services Limited Information Technology 0.20
500570 Tata Motors Ltd. Transport Equipments 0.60
500400 Tata Power Co. Ltd. Power 0.70
500470 Tata Steel Ltd. Metal,Metal Products & Mining 0.75
507685 Wipro Ltd. Information Technology 0.20