Impact of Telecom Sector's Reform on Economic Growth (With Special Reference to Indian Economy

Impact of Telecom Sector’s Reform on Economic Growth

(With Special Reference to Indian Economy)

Dr. Gurendra Nath Bhardwaj

Associate Professor & Deputy Registrar (Academic Operations)

NIIT University, Neemrana, Rajasthan. (INDIA)

Email: [email protected],

[email protected]

+91-1494-302427, 2413, Mobile +91-9910634497, 9251083103

Shrey Kumar

Student, B. Tech. 2013-17

NIIT University, Neemrana, Rajasthan. (INDIA)

Mobile No: +917838407234

Email: [email protected],

Page 1 of 21

Abstract:

In today’s fast growing scenario, efficient communication plays a

very crucial role. Where most of the business activities depend

on this type of communication, surely efficient communication

becomes “make or break factor” for many of the business

activities. In India, sectoral contribution in GDP has changed

drastically. At the time of independence, the Primary Sector was

dominating, then secondary sector became dominant, but after

second generation reform in India, the share of service sector

has increased tremendously. Now it contributes more than half in

the total GDP. In 2011, it contributed 58.2% in India’s GDP. As

per GDP data of 2011, the service sector’s contribution of India

is ranked at 11th position in the world economy. There are

several factors that are responsible for this growth, which are

globally recognized like innovation capacity, infrastructure

development, government support and telecom density etc.

Obviously when shares of service sector increase the sub-sector

performance will also increase, therefore the growth

telecommunication has also increased in recent years.

The Present study intends to understand the role of Telecom

industry in the economic growth of India, as well as barriers in

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the growth. It will also examine the role of government to make

favorable policy for the growth of this sector. Therefore, the

study will focus financial and non-financial factors responsible

for the growth apart from their contribution within the industry

as well as inter-industry segment. Due to the increasing use of

Information technology, the service sector oriented economy needs

to focus intensively on telecom industry reform for faster

growth.

Key Words: Telecom Density, Telecom Operator, Spectrum, Licensing

Introduction:

Opening up of economy, has impacted lot of sectors of Indian

Economy, but service sector has got more benefits. Therefore, it

can be visualized that after 1991, the growth of service sectors

witnessed rapidly. One of the reasons behind the faster growth of

services sectors in comparison to manufacturing and agricultural

sector is the cost structure of these sectors. In Agriculture and

manufacturing the proposition of direct cost is higher than to

service sectors and secondly, the margin rate is lesser for

Agricultural sector than the manufacturing sector. Therefore,

profit changes when compositions of cost changes. However, for

service sector especially for telecom sector the investment cost

(long term) is higher than the operating one. So it is treated as

capital intensive industry, so this demands higher proportion of

sunk cost, then fixed cost and rest about negligible proportion

of variable cost. With reference to telecom sector, mainly the

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cost can be divided in three main elements switching cost,

transaction cost, and infrastructure costi.

Due to capital intensive industry the no. of players is always

less, this sector comparing to other sector. Another important

factor is that telecom is techno sensitive sectors, which creates

another pressure on the whole industry. Change in technology

related with software, hardware, and data transfer etc. impact

the profitability of this sector up to significant extent.

Another, aspect is that it is supply pushed industry, like to

provide the service and deciding the tariff the service provider

must ensure that the available range of frequency and spectrum

usage is available to him, like for example the owner of 2 G

spectrum platform cannot bring any telecom service which

necessarily needs usage of 3G or beyond. This also leads to

secondary trading of spectrum means, the service provider may

purchase customized amount of space of particular spectrum on

need based rather going for auction of standardized slots of

spectrum.

Objective:

To understand the role of Telecom industry in the economic

growth of India.

To examine role of government to make favorable policy for

the growth of this sector.

To assess relationship among micro and macro economic

variables affecting telecom industry.

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Review of Literature:

Dymond, &, Sonja, 2003, explain how the competition in the mobile

sector affected the universal access. They also highlighted the

steps taken by the Government to improve the efficiency including

regulatory reforms like establishing tariff and interconnection

rules, licensing, spectrum allocation, and removing other

barriers. The study focuses on how penetration has increased

after privatization, which ultimately increased the competition

in the market, consequently consumer got the benefits of better

service at lower price, choice of services, and more innovation

in the services. China has been indentified the most potential

market for this growth. Mobile has provided low cost service to

the rural people than the fixed line phones. The reform also

motivates carriers to design innovative price strategies

frequently, keeping in the mind the affordability of the services

by poor and lower middle income segment comparing the start up

cost and monthly cost of prepaid mobile is cheaper than the fixed

phones in most of the countries. Policy makers must understand

the efficiency gap and true access gap. However, technology

neutrality, price regulation, encouraging public access, resale,

interaction & mining, regulatory fees and costs are significant

factors for this sector.

Bhattacharya 2003, presents the competition in the telecom sector

and its results, inter countries, comparison, synergy between

telecom and IT, competition policy and technology etc. with

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reference to no. of telephone lines. Indian was at 14th place in

1995, had reached at 7th place in 2001 among top 14 economies of

the world. Therefore, is significant relationship between

productivity and prices? So decline in per line revenues at

constant prices in the same period shows the competitive pressure

in the sector. The tele density has gradually increased in most

of the countries after telecom sector reform. Enhancement of

spectrum from 2G to 3G and 4G has also contributed significantly

in the development of tele com sector. Tele density laso has

close relationship with per capita income, sectoral contribution

in GDP. However, it also depends on the overall growth of service

sector. IT education, training and skill development in human

resource is fundamental of the reform process. Therefore,

availability of computers, mobile, tabs and estimated internet

users are also closely related. However, the Government has taken

various policy initiatives to promote telecom and internet

services in the rural area as well. Reform impact the economy by

establishing technology past fiscal incentives, simplification of

administrative rules and procedure improving institutional

finance. It provides viable techno economic alternative at

affordable prices to the consumer and better entrepreneurial

culture and developing huge employment generation in other

related sectors also. Due to improvement ion ICT telecom sector

has grown manifold.

Greve, 2003 expressed the concern about role of government on

public sector reforms and how to evaluate the government

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initiatives and their results, political and administrative

flexibility endorsed by the Politian and civil servants has

created obstacles in systemic evaluation of recognition. In the

special reference to Denmark, the paper highlighted the issue

related to public sector reforms, and its evaluation. The

government has cut down the no. of bodies and councils, earlier

meant for advice, due to politically labeled and found

responsible for the wastage of money. Many bodies were

corporatized, then privatized to improve the efficiency in their

working. However, it was also observed that unsystematic

evaluation of reorganization created space for un accountability

and higher political strategies.

Bouckaert 2009, explains the reasons and implementations of the

public sector reforms in three ways like governments ensure

responsiveness and better, faster and more services, re-

establishing of government trust in the public. In Western

Europe, it was also due to major share of government business

activities with deficit, therefore, effectively less significant

contribution in GDP growth. Political uses of public resources

through public sector enterprises also an issue, which also

creates distrust among the public. When citizens are treated as

customer then it demands good competitions among the firms and

fair transaction at reasonable prices. It was also observed that

public sector reform is a never ending story. It is dynamic

process as act leads to another act or problem for which new

research need to be done to find out the solution.

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Fink, Mattoo, & Randeep 2002, examine the Asian countries about

telecom sector reform. It is observed that where government

involves in business, they don’t wish to leave ownership even,

there is huge loss or inefficient use of public resources. They

hardly allow unrestricted entries of private players. It focuses

on identifying elements of good telecommunication policy and to

improve that through multilateral negotiations. It also raises

the issue about the extent of competition, social benefits by

privatization, fear of foreign investment, role of regulators to

ensure fair trade practice, impact on income distribution and

poverty level. The study raised questions like are any good

reasons to limit the number of supplier, limit the foreign

ownership and its impletion etc. Corporatization has positively

improved availability of services its quality and labour

productivity. There is also a need to reframe safeguards for

consumer and foreign supplier.

Data Analysis

Telecommunication in India has been identified one of the most

developing sector. It also contributes significant contribution

in GDP as well as it generates direct and indirect employment and

revenues. The Flow of FDI as plays a important role in the

assessment of sectoral growth. As per the report till December

2014 from Department of Telecom, Government of India, 3rd highest

FDI attracting specific sector of India. As depicted in the

Graph#1, the telecom sector has attracted 7% of FDI. Since it

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also affect the IT Hardware sector, which also visible and IT

hardware has also attracted 6% of FDI. Due, telecom sector

reform, private players have joined the telecom sector and IT

hardware also, which collectively, attracted 13% of FDI.

Graph#1

18%10%7% 6% 5% 5% 4% 4% 4% 3%

34%

SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

% of Total Inflows

Source: Databook for PC; 22nd December, 2014

As mentioned in Table #1, during last 10 years average YoY growth

is around 96 % per annum, which has pumped in FDI of Rs

836,970.75 million, from the year 2000 till January 2015. Since,

this is a capital intensive sector, therefore, inflow of FDI,

brought the high marginal efficiency of the capital. The major

FDI contributing countries need to be indentified. As per table

#2, three major countries are Mauritius, Singapore and Russia,

with 65.86%, 17.69% and 4.98% respectively, covering 88.53% FDI

Page 9 of 21

contributors in telecommunication sector of India, till January

2015.

Two more variables like Tele-density and revenue during 2006-2007

to 2013-2014, also shown significant growth as mentioned in table

#3 and table #4 respectively. To examine the impact of reform on

telecom sector, three variables have been identified; Sectoral

Revenue, Tele-density, and Foreign Direct Investment (FDI).

Revenue has been taken as dependent variable, and Tele-density

and Foreign Direct Investment. The data for 7 years during 2006-

2007 to 2012-2013, all values were collected.

Hypotheses: 01 Tele-density and inflow of FDI has no significant

impact on revenue of Telecom sector in India.

To check the above hypotheses following regression model has been

developed.

y(Revenue )=α+β1(FDI)+β2(TeleDensity)+ε --------------------(1)

SUMMARYOUTPUT

Regression StatisticsMultipleR

0.924306874

R Square 0.854343198

AdjustedR Square

0.781514797

Standard 2.73

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Error 1189657

Observations

7

ANOVAdf SS MS F Signific

ance FRegression

2 175.011

87.50549

11.73091 0.021216

Residual 4 29.83759

7.459397

Total 6 204.8486

Coefficients

StandardError

tStat

P-value Lower95%

Upper 95%

Lower95.0%

Upper95.0%

Intercept

22.14666774

2.963614

7.472859

0.001714 13.91836

30.37498

13.91836

30.37498

XVariable1

1.4109E-05

2.64E-05

0.534675

0.621212 -5.9E-05

8.74E-05

-5.9E-05

8.74E-05

XVariable2

0.217031261

0.046437

4.673625

0.009493 0.0881

0.345962

0.0881

0.345962

RESIDUALOUTPUT

PROBABILITY OUTPUT

Observation

Predicted Y

Residuals

Percentile Y

1 26.42162346

-3.12162

7.142857 23.3

2 28.55238343

3.547617

21.42857 32.1

3 31.8 1.374 35.71429 33.2

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2543345

567

4 35.31534083

-2.01534

50 33.3

5 38.59829054

-0.89829

64.28571 37.7

6 40.49846348

0.301537

78.57143 39.1

7 38.28846481

0.811535

92.85714 40.8

At 95% confidence level, results of equationy(Revenue )=22.147+β1(0.000)+β2(0.217)+ε (2.73), show that FDI has not

a significant role in the revenue of telecom sector, tele density

has functional relationship with revenue of telecom sector.

However, P value of only intercept is significant, but in case of

two independent variables results are not statistically

significant and value of R Square 0.854343198 and Adjusted R

Square 0.781514797, show the power of explanatory variable to

explain the dependent variable is quite strong. The same time

value of Correlation between Telecom revenue and tele-density

during this period also comes .92, which shows strong positive

correlation between two variables.

Graph#2

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0 10 20 30 40 50 60 70 80 90 100050

Normal Probability Plot

Sample PercentileY

As mentioned in above graph#2, the normal probability plot shows

that due to less no. of observations (7years), we can expect

perfect normal distribution of data series, and also show that

both are variables are not necessarily mutually dependent.

Therefore, there are other variables which need to be included to

explain the revenue of telecom sector.

Conclusion:

In India, Telecom sector has grown significantly, after second

generation economic reform. Before, 1991, economic reform the

government had monopoly in telecommunication sector, has changed

the market in oligopoly. As mentioned in table #5, now many

leading telecommunication companies like Ericsson, Elcoteq, LG,

Nokia, Aspocom, Salcomp, HonHai (FoxConn) Precision Industry

Co. , Perlos, Laird Technologies,  Alcatel, Samsung, Flextronics,

Motorola, Nokia Siemens Network, and Velankani Information System

Pvt Ltd, have invested huge amount for Facility for manufacturing

GSM Base Stations and Mobile Switching equipment, R&D facility

and Global Service Delivery Centre, Telecom manufacturing, Mobile

handsets manufacturing, Global Network Operation Centre forPage 13 of 21

Customers in Asia Pacific Region, Europe, Middle East and Africa,

High density interconnections PCB manufacturing plant, Mobile

Phone Chargers, Manufacturing of mobile handsets and components

and Electronic Hardware and related Services, Manufacturing of

Mobile phone accessories, WiMax Centre etc.  Manufacturing of

Telecom Hardwares such as Cell phones, Set Top Boxes, Optical

Networking systems etc. Mechanical and System integration of Base

Stations, Wireless network equipment and Electronic hardware &

software including ITes etc.

The above, investment by private players brought quality

employment, product innovations, IT hardware and software growth

etc, after telecom reform took place in India.

Page 14 of 21

iReference: 1. Dymond, Andrew, Oestmann, Sonja, 2003, The Role of Sector Reform in Achieving

Universal Access. 2. Bhattacharya Manas, 2003, Telecom Sector in India: Vision 2020, Background

Paper submitted to the Committee on India: Vision 2020.3. Greve, Carsten, 2003, Public Sector Reform in Denmark : Organizational

Transformation and Evaluation4. Bouckaert Geert, 2009"Public Sector Reform in Central and Eastern Europe",

Halduskultuur, , vol 10, pp.94-104.

5. Fink, Carsten; Mattoo, Aaditya; Rathindran, Randeep 2002 : Liberalizing basicTelecommunications : The Asian Experience, HWWA Discussion Paper, No. 163

6. Yu, Liangchun, Berg, Sanford, Guo, Qing, 2004, Market Performance of Chinese Telecommunications: New Regulatory Policies, Telecommunications Policy.

7. PPIAF, THE WORLD BANK, Um, Paul Noumba, Gille, Laurent, Simon, Lucile Rudelle, Christophe, 2004 A Model for Calculating Interconnection Costs in Telecommunications, PPIAF, THE WORLD BANK.

Annexure:

Table #1

Year Wise FDI Equity Inflows in Telecommunications(From April 2000 To January 2015)

S. N. Year FDIin Rsmillion

YoY %growth

1 2000-01

7,841.59

2 2001-02

39,384.61 402

3 2002-03

9,077.31 -77

4 2003-04

3,978.40 -56

5 2004-05

5,411.01 36

6 2005-06

27,514.50 408

7 2006-07

21,495.77 -22

8 2007-08

50,995.61 137

9 2008-09

116,848.11

129

10 2009-10

122,696.62

5

11 2010-11

75,420.44 -39

12 2011-12

90,115.26 19

13 2012-13

16,543.04 -82

14 2013-14

79,872.83 383

15 2014-15

169,775.66

Average

(UptoJanuary,

2015)

96

GrandTotal

836,970.75

Source: Department of Telecom, Government of India.

Table #2Country-Wise FDI Equity Inflows of Telecommunications Sector

(From April 2000 To January 2015)

S.No

Name ofthe

Country

Amountof

ForeignDirectInvestment

Inflows

%agewithInflows

    (In Rsmillion

)

1 Mauritius 539,560.26

65.86

2 Singapore 161,418.92

17.69

3 Russia 46,011.93

4.98

4 Japan 15,682.62

1.89

5 U.S.A 13,759.38

1.74

6 Cyprus 11,866.41

1.49

7 United Kingdom

11,007.34

1.43

8 Country Details Awaited

8,018.28

1.07

9 Germany 4,231.64

0.59

10 Netherlands

4,024.77

0.52

11 NRI *** 3,330.07

0.45

12 UAE 3,393.75

0.39

13 British Virginia

2,248.20

0.28

14 Australia 1,903.38

0.25

15 Spain 1,744.92

0.23

Source: Department of Telecom, Government of India.

Note : 1. Amount includes the Inflows received through SIA/FIPB route, acquisition ofexisting shares and RBI's automatic route only.

2. Complete/ Separate data on NRI Investment is not maintained by RBI. However, the aboveFDI Inflows data on NRI Investment, includes Investment by NRI's, who have disclosed theirstatus as NRI's, at the time of making their Investment.

Table #3

Year wise Growth in Teledensity

Financia

l Year

Teleden

sity

YoY

Growth

%2006-

2007

18.3

2007-

2008

26.2 43.2

2008-

2009

37 41.2

2009-

2010

52.7 42.4

2010-

2011

70.9 34.5

2011-

2012

78.7 11.0

2012-

2013

73.3 -6.9

2013-

2014

75.2 2.6

Source: India Brand Equity Foundation

Table #4

Year wise Growth in Revenue

Financia

l Year

Revenu

e

YoY

Growth

%2005-

2006

19.6

2006-

2007

23.3 18.9

2007-

2008

32.1 37.8

2008-

2009

33.2 3.4

2009-

2010

33.3 0.3

2010-

2011

37.7 13.2

2011-

2012

40.8 8.2

2012-

2013

39.1 -4.2

2013-

2014

Source: India Brand Equity Foundation

Table #5

Investments in Telecom Equipment Manufacturing

Sl.No.

Name Location Nature of Project

1 (i)         Ericsson

Jaipur Facility for manufacturing GSM Base Stations and Mobile Switching equipment

  (ii)         Ericsson

Chennai R&D facility and Global Service Delivery Centre

  (iii)        Ericsson

Gurgaon R&D facility and Global Service Delivery Centre

2 Elcoteq Bangalore Telecom manufacturing

3 LG Pune and Noida Mobile handsets etc.

4 (i) Nokia Chennai Mobile handsets manufacturing

  (ii) Nokia Chennai Global Network Operation Centre for Customers in Asia Pacific Region, Europe, Middle East and Africa.

5 Aspocom Chennai High density interconnections PCB manufacturing plant

6 Salcomp Chennai Mobile Phone Chargers

7 HonHai (FoxConn) Precision Industry Co. 

Chennai Manufacturing of mobile handsets and components and Electronic Hardware andrelated Services

8 Perlos Chennai Handset Mechanics

9 Laird Technologies

Chennai Manufacturing of Mobile phone accessories

10  Alcatel Chennai WiMax Centre etc. 

11 Samsung Manesar, Gurgaon, Haryana

Handset manufacturing

12 Flextronics Chennai Manufacturing of Telecom Hardwares

Source: http://www.dot.gov.in/investment-promotion/telecom-equipment-manufacturing